Beyond Class A: Winning Investment Strategies In The New York City Office Market

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On the surface, the news from the New York City office sector may look grim: vacancy rates nearing 20%, occupancy rates stubbornly stuck at around 50%, interest rates rising, values dropping, anemic investment sales activity and owners giving keys back to lenders.

Fortunately, that isn’t the full story. In my previous Forbes article I explained that landlords were holding on to Class A buildings with strong tenants while letting go of other properties. Additionally, four other strategies show long-term health for the office sector:

  1. Repriced assets are attracting investors to properties with current weak fundamentals but strong potential.
  2. Entities such as Hyundai, NYU and Enchante are snapping up buildings for their own use.
  3. New York City’s housing crisis has prompted developers to consider office to residential conversions, which I explored in a March 2023 Forbes article.
  4. Also, while office finds its footing, there is another workplace and innovation asset class that continues to see strong demand citywide: life sciences. This demand has led a number owners to consider building life sciences centers. Elevate Research Properties was formed to fill this gap and to provide the specialized expertise required to close it. New York City, for example, has 2 million square foot of space dedicated to life sciences, compared to San Francisco’s 60 million and Boston’s 40 million. The sector already contributes $3.1 billion to the City’s gross metropolitan product and offers unique assets such as:

* Nine major academic medical centers and over 50 hospitals

* 10+ incubators to support early-stage life sciences companies

* New York City research centers that receive over $2 billion in annual funding from the National Institutes of Health (NIH)

* 5,100 life sciences companies, with industry-leading firms attracting more than $1 billion in annual venture capital investment

* 150,000 related jobs

* 7,000+ graduate students and postdocs at universities

“The research is happening here, but then the tenants have to leave to go elsewhere for lab space,” Balestra said. The vacancy rate in New York City for finished and occupied lab space is virtually zero, so we saw the opportunity to create additional space. CBRE reports that the scarcity of lab space is reflected in the rents. The average asking rent in Manhattan for lab-exclusive space rose to $122.23/SF in the first quarter. This is up 19% compared to 1Q 2022. Colliers reported that the average asking rent in Manhattan’s Class A & B office buildings was $74.42/SF in 1Q 2023. There are, however, a range of factors in pricing lab space, including an extensive specialized building infrastructure.

The New York City Economic Development Corporation (NYCEDC) recognizes the potential of the life sciences sector and is committed to seeing it flourish. Through LifeSciNYC, NYCEDC is making a $1 billion investment in life sciences research and development, allocating $430 million for lab and incubator construction and $450 million to spur new research.

Repurposed Buildings vs. New Development

Taconic Partners, which has developed and repositioned over 12 million square feet of office, mixed-use, and retail space, and close to 6,500 units of multifamily housing in the last 25 years, ventured into the life sciences sector after the New York Stem Cell Foundation Research Institute approached the firm about five years ago with a request for lab space.

The Research Institute was specifically interested in a 325,000-square-foot office building Taconic owned in the West 50s that was built in the 1930s as a film-editing house for Warner Brothers Pictures. Taconic agreed to repurpose space for the Research Institute and then constructed additional turnkey lab space and upgraded the building infrastructure to support life sciences tenants, creating what is now called the Hudson Research Center.

Balestra said Taconic Partners and Elevate Research Properties have since expanded their life sciences projects into three additional developments, including the following:

* West End Labs, New York’s newest Class-A research facility, was recently completed and announced its first tenant: Graviton Bioscience. The $600 million development at 125 West End Avenue features a state of the art lab infrastructure, prebuilt laboratory suites, 300-person event space, and a 15,000 square foot landscaped rooftop terrace with views over the Hudson River. Originally built by Chrysler as an auto service center and showroom, the property served as part of the New York City headquarters for Walt Disney Company/ABC from 1985-2021.

West End Labs, a $600 million, 400,000-square foot development at 125 West End Avenue, features a

state-of-the-art lab infrastructure, prebuilt lab suites, a 300-person conference and event space and a 15,000-square foot landscaped roof terrace with views of the Hudson River.

Taconic Partners

* A third site, Iron Horse Labs at 309 East 94th Street on the Upper East Side, will combine ground-up construction with an existing structure and stitch the two together to create a brand new 200,000-square-foot, state-of-the-art, purpose-built research laboratory. The building is located near world-class institutions in the Upper East Side, including Memorial Sloane Kettering Cancer Centre, Mt. Sinai, The Rockefeller University, and Weill Cornell Medicine.

Iron Horse Labs will be a brand new 200,000-square-foot, state-of-the-art, purpose-built research

Candidates for Conversion

* Significant floor load ratings, far greater than what is needed for a typical office floor

* Ceiling heights that are in the 13- to 15-foot range

* Ideally, a building that is vacant

* A sufficient budget to cover buildout costs that are far greater than for traditional offices, and on top of that, higher expenses for installing supplemental systems

Decentralized Network

Unlike Cambridge, MA, or San Francisco where life sciences facilities are centralized, new or repurposed buildings in New York City are scattered throughout Manhattan and the boroughs. In addition to the West Side, Upper East Side and Kips Bay locations cited above, I’ve listed a few additional sites below:

* West Harlem has a growing cluster that includes over 500,000 square feet at three private developments: the Taystee Lab, Sweets and Mink buildings.

The 350,000-square-foot Class A, new construction Taystee Lab Building in West Harlem.

Taystee Lab Building

* The New York Genome Center’s headquarters at 101 Avenue of the Americas just north of Canal Street, offers over 170,000 square feet for research and development, including 30,000 square feet of sequencing lab space.

* Innolabs, Alexandria Bindery and additional new projects will bring a total of 1.25 million square feet of lab and office space online in Long Island City, Queens, by 2024.

* The Montefiore-Einstein Accelerated Biotechnology Research Center (EMBARC), a bio-manufacturing operation focused on cell, gene, and antibody therapy production is planned for the Bronx; as well as the Einstein Incubator, which will offer premier lab space for early-stage life sciences and biotech startups.

* A new 50,000-square-foot biotech incubator is planned for the Brooklyn Navy Yard that will be supported by a $20 million contribution from the LifeSci NYC initiative.

In the latest Coffee & Cap Rates Podcast, Shimon Shkury, President and Founder of Ariel Property

Advisors, interviews Chris Balestra, President and Chief Investment Officer of Taconic Partners, about how and why the firm began offering office space to life sciences companies and its existing and planned projects.

Ariel Property Advisors