Projects Shelved in the Downturn Spring Back to Life

By JULIE SATOW

During the recession the developer Brookfield Office Properties shelved plans to build several office towers on a 5.4-million-square-foot property that runs from Ninth Avenue to Dyer Avenue, between West 31st and West 33rd Streets. But Brookfield did not ignore the project in the downturn.

The developer spent the last several years studying the engineering of a deck over the rail yards on the site, and says it has found a way to build it cheaper and quicker. It will start construction later this year, with plans to deliver a two-million-square-foot office tower designed by Skidmore, Owings & Merrill on the northeast corner of the parcel by 2015. There are plans to eventually construct as many as three towers.

“We will start building the deck on spec but are confident that by the time we get around to building the tower, we will have found an anchor tenant,” said Ric Clark, the president and chief executive. While he declined to give asking rents for the tower, Brookfield has begun preliminary conversations with tenants and expects to be competitively priced with the Hudson Yards buildings the Related Companies is planning a few blocks west.

As rents rebound and vacancies fall in the New York office market, some developers like Mr. Clark who shelved projects in the recession are resurrecting their plans. Several buildings are in the pipeline, and nearly 9.5 million square feet could become available over the next few years — in addition to several million more square feet at the World Trade Center in Lower Manhattan and the Hudson Yards.

A number of factors are driving the trend. Commercial rents are rising in certain submarkets and have held steady in others. Builders who believe the market has turned are preparing sites now in the hopes their projects will come online when higher rents are firmly established.

The city’s aging office stock is another factor. Nearly 83 percent of the office buildings in Manhattan were built more than three decades ago, according to the real estate company Cassidy Turley, and just 6.6 percent have been built since 1990. Many tenants, particularly law firms and financial services companies, crave new space that can be more efficient and tailored to their needs. Finally, construction costs could fall as union contracts begin expiring over the next few months and contractors push to exclude costly labor rules.

“A year ago people were saying the market was so bad they wouldn’t contemplate ground-up construction,” said John F. Powers, the chairman of the New York tri-state region for CB Richard Ellis. “But now, there is upward pressure on rents in some segments of the market, and certainly there is no more downward pressure, so developers are beginning to run pro formas again,” he said, referring to the method of estimating a project’s cost.

In the first quarter of this year there were 15 office leases in Midtown at rents above $90 a square foot, compared with 23 for all of 2010, according to Cushman & Wakefield. At the same time the vacancy rate in Midtown has dropped to 10.3 percent, compared with 12.6 percent at this time last year.

Tenants considering locking in new space now, before rents rise further, include Time Warner Inc., the financial services behemoth UBS and the law firm Mayer Brown. According to Cassidy Turley there are 446 tenants in the market chasing less than 28 million square feet of space.

Particularly well-poised are those developers who had begun preparing before the recession and can resume construction now at points further along. Pacolet Milliken Enterprises, the sister company of the textile firm Milliken & Company, demolished the building at 1045 Avenue of the Americas, a full block between West 39th and West 40th Streets, in 2009. The company has completed the schematic design for a 350,000-square-foot office building at the now-vacant lot, and has hired the Houston-based real estate firm Hines as a consultant.

“We feel very confident about the market and the location,” said Richard C. Webel, Pacolet Milliken’s president. He said the company had been speaking preliminarily with tenants, though it had not yet hired a broker. As for timing, “based on who we have talked to, the market should be there by 2015 or 2016, if not sooner,” Mr. Webel said.

Timing is critical as the market starts to revive, experts said. “The first buildings to be up and running will be most successful in grabbing an anchor tenant,” said Robert Sammons, the vice president for research services at Cassidy Turley.

Boston Properties is banking on this as it revives construction on a 1-million-square-foot office tower at 250 West 55th Street; building stopped in 2008 after the foundation was poured. Since it is partially built, it will be a relatively short time — mid-2014 — until Boston Properties can deliver the building to tenants. Already, it is in lease negotiations with the law firm Morrison Foerster as an anchor tenant.

Another tower that is being closely watched is 20 Times Square. Vornado Realty Trust has had a plan for the 1.25 million-square-foot office building, which will be built over the Port Authority Bus Terminal, for several years. Steven Roth, Vornado’s chairman, recently said he would consider erecting the tower before signing an anchor tenant, thanks in part to a multimillion-dollar cash infusion from an unnamed investor.

Not all of the new construction is in Midtown. In Greenwich Village, Edward J. Minskoff Equities is expecting to break ground this summer on 51 Astor Place, a 430,000-square-foot mixed-use mixed-use office building. “With technology getting hot again, and Midtown South having the lowest vacancy rate in the country at 8 percent, a new building in the vicinity should do well,” Kenneth J. McCarthy, the senior economist and senior managing director for research at Cushman & Wakefield, said.

Another factor that could spur development is coming contract negotiations between the construction trade unions and contractors. Thirty labor-contractor collective bargaining agreements are set to expire on June 30, and contractors are pressing for significant cost reductions.

Already, builders have been increasingly using nonunion laborers for projects, and among the sticking points will be what some contractors and owners consider archaic and costly work rules.

“One part of the equation is rents, but the other part, which is very important, is the cost of construction,” Mr. Powers said. While it would be a boon for developers if labor costs were reduced, the fight is expected to be tough, said John Krush, an executive managing director at Newmark Knight Frank Project & Development Management. There is a possibility that unions could call for work stoppages, and “a stoppage of any length — one month, one week — would be incredibly costly for developers,” he said.

“Negotiations are just beginning, and it is far too soon to speculate about whether there will be work stoppages, or what may or may not happen,” said Gary LaBarbera, the president of the Building and Construction Trades Council of Greater New York.

Still, office development seems poised to rebound. “There are several players who have financing, who have the land, and have been waiting on the sidelines for some indications that the market is improving,” Mr. Sammons said. For those builders, “the time is now.”