What Third Avenue foretells about the future of New York offices

 

“Third Avenue is a microcosm of the Manhattan market”

 

In New York’s office market, a couple of blocks can make all the difference between thriving and surviving — or not surviving. 

 

Such is the case on Third Avenue, where availability is over 20 percent. A few blocks away, on Sixth and Park avenues, average availability is 11 to 12 percent, just a point or two away from a healthy equilibrium. 

 

An Aging Neighborhood

Third Avenue has been harder hit than its neighboring Midtown corridors (between 40th and 59th streets) by the shift to remote work. “Third Avenue has always been a value play corridor,” Wallach said. Now, those Third Avenue offices are aging. Even the nicest of them can’t stake a claim upper-tier Class A status, making them the victims of the city’s recent flight-to-quality.

 

Before the pandemic, that meant lower rents and slightly higher vacancy. But now, it means a much higher vacancy. In mid-2022, Third Avenue had an availability rate of up to 29 percent. That was higher than Manhattan’s overall average at the time, and a far cry from Midtown’s average of 16.4 percent. 

 

Renovations

The most obvious play for a landlord of an aging tower is a renovation. The reasoning is simple: Class A buildings, even those with less-than-ideal locations, have far outperformed their aging peers. Even the most ambitious renovation won’t be enough to draw tenants from Midtown’s best offices. But it can draw them away from competitors on Third Avenue, or those Downtown, where rents are more comparable. 

 

Conversions

Lower Manhattan may be the epicenter of office-to-residential conversions, but there are several potential conversion plays along Third Avenue, too. 

 

Healthcare Pivot

While major office leasing industries including finance and law have shifted away from Third Avenue, others have moved in to take some of that space. Memorial Sloan Kettering shocked the real estate world in 2022 when it purchased half of 885 Third — the famous Lipstick Building — for $300 million. MSK turned the building into a major hub for its administrative and research staff, rather than a traditional health care facility. The space was previously home to law firm Latham & Watkins, which moved to Sixth Avenue in 2021. Some Third Avenue offices have found a niche catering to government tenants, thanks to their proximity to the United Nations headquarters.

 

Value Play

Even as some office landlords try new strategies to win over tenants, some have embraced the role of the value play by offering lower-than-average rents.

 

 

Whether any of these strategies can save Third Avenue’s office market remains to be seen. You can read more here.  

 

While we specialize in residential real estate it is important to keep informed about the commercial market as well. We will continue to keep you updated.