Sub-lease race on for highest-paving tenants

Real Estate Weekly, Nov 26, 2008 by Daniel Geiger

More financial firms are shedding luxurious offices in what appears to be a swift makeover of Manhattan's market for high-end space in the wake of historic financial tumult and a sharp downturn in the economy.

The hedge fund SAB Capital is giving up 10,600 s/f, a portion of the 21st floor, at the General Motors Building, a skyscraper widely considered one of Manhattan's most elite trophy towers.

CIT Group, a commercial lender, has put almost 11,000 s/f of the 110,000 s/f it leased in 2005 at the boutique office building 505 Fifth Avenue on the market for $88 per square foot.

National Financial Partners, a financial services company whose shares have fallen 94% this year, is giving up 31,450 s/f at 340 Madison Avenue, floors 19, 20 and 21 with a term stretching to 2023.

Hedge fund RiverPark Capital is giving up about 7,612 s/f, part of the 17th floor, at the soaring Tishman Speyer owned tower 156 West 56th Street.

The group adds to a growing list of once high-flying tenants who have begun to hastily give up offices in September and October, months that were wracked by financial crisis.

One broker, who didn't want to speak on the record because his stark assessment would not be popular among the landlords with whom he does deals, said that many owners of trophy assets are going to have to come to grips with the fact that prime spaces will have to be discounted, in many cases significantly, to attract deals.

The person said that even in Manhattan's best buildings, where rents had charted towards and in some cases even exceeded $200 per square foot during the rental boom, landlords will have to readjust rates to the low $100s to make all but the most unique spaces competitive. The person said that the readjustment is a return to the rents of two years ago.

The shakeup parts with previous predictions that the high end of the Manhattan office market would remain resilient in the city because its short list of trophy buildings catered to what some felt would be an ever-present echelon of successful firms in the business world who would always have the wherewithal to pay top dollar.

But the leasing of high end space has been concentrated in the hands of hedge funds, private equity firms and other specialty investment companies hard hit by the difficult financial times.

These companies dealt in billions of dollars and collected handsome fees during what is now being described as a bygone gilded age for the industry before suffering from the catastrophic problems that have remade Wall Street in recent months. Their small size and concentration of wealth gave them the ability to fork over large sums for opulent spaces and their freewheeled spending drove up the market for luxurious offices.

Now the good times appear to be over. Many investment firms made the same risky bets as the large financial institutions that collapsed in what was an astonishing succession of Wall Street catastrophes during late summer. Others are finding it difficult or impossible to continue operating within the industry's prevailing business model of highly leveraged returns amid the credit crunch.

Wealth on Wall Street had been so great in recent years that high-priced deals began expanding beyond the market for only boutique spaces. Larger funds and companies took bigger space at rates commensurate to their smaller counterparts. That segment of the market appears to have flamed out in particularly bright fashion.

iStar, a mortgage REIT, took over 100,000 s/f at 1095 Avenue of the Americas for rents that start at nearly $140 psf. Late last year the company, whose share price has plummeted, decided to sublease the space. So far there haven't been any takers.

Centerline Capital, another commercial real estate lending company, is also handing over roughly 100,000 s/f it leased at 1095 Avenue of the Americas for $140 per square foot.

Across the street at One Bryant Park, the jumbo-sized hedge fund Marathon Asset Management has marketed up to 27,000 s/f of the 76,000 s/f it leased in the pricey new tower for $115 per square foot in early 2007. That's on top of the 10,000 s/f that Marathon subleased over the summer to the Korean financial firm, Mirae Asset.

HBK, a Dallas based hedge fund, has given back a portion of the 36,000 s/f that it leased in the building last year for $135 psf and there are rumors the firm may now want to give back more.

Although many financial firms have moved to lessen their expenses by dumping costly offices, getting rid of the space hasn't been an easy task. Brokers say that concerns about the economy and widespread opinion among tenants that rents will fall sharply in the coming months have prompted tenants with only the most pressing space needs to go out and sign leases.

Also complicating the subleasing process for investment funds is the uncertainty that hangs around their financial health and the logistical difficulties involved in handing over their spaces.

The hedge fund Trafelet, for instance, is offering its space at 590 Madison Avenue, the entire 25,000 s/f 39th floor. Brokers say that it would ideally like to keep 10,000 s/f for its operations, but has offered to cater to different sized tenants in order to attract more potential takers.