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SL Green’s Third-Quarter Results Show Tenants Are Turning to Top-Tier Properties

Largest Manhattan Office Landlord Touts Leasing Activity, Rent Levels That Are Ahead of Its 2021 Goals

Top-tier properties such as SL Green Realty’s One Vanderbilt tower have dominated New York’s leasing activity headlines. (CoStar)

By Andria Cheng CoStar News October 22, 2021 | 12:32 P.M.

As New York’s wounded office market recovers from the heavy blow of the pandemic, landlords with top-tier properties look to be healing faster and benefiting from the so-called flight to quality.

Take SL Green Realty, Manhattan’s largest office landlord, as a telling example of how leasing is going in major U.S. gateway cities. The real estate investment trust’s CEO, Marc Holliday, said Thursday it’s “well ahead” of its goals for the year and accomplishing that with rent levels that are also topping its own forecast.

One driver of that is the company’s year-old trophy tower, One Vanderbilt, which is over 91% leased and is expected to beat its year-end target. On Thursday, the tower debuted its multilevel Summit observatory deck, which Holliday said will be a “hit” that benefits the company “tremendously.” Advance ticket sales for Summit have been at or ahead of expectations, he said.

Just what kind of boost may Summit be for One Vanderbilt? The Empire State Building’s observatory pre-COVID-19 represented nearly two-fifths of the property’s 2019 revenue. Meanwhile, private equity firm KKR recently bought a majority stake in Edge, the tallest outdoor sky deck in the Western Hemisphere, at Hudson Yards, the largest U.S. private development, on the west side of Manhattan.

One Vanderbilt’s leasing accomplishment has come “despite COVID and despite every dire prediction of the city’s demise,” Holliday said on a conference call with Wall Street analysts. “We’ve established a new category of building, a new icon on the skyline and a new model for the workplace.”

Part of that model includes meeting increased tenant demand for amenities. Chef Daniel Boulud’s restaurant Le Pavillon, which opened at One Vanderbilt in May, has been fully booked, with hundreds on the waiting list each night, Holliday said, adding the restaurant faced many skeptics’ questions at opening about whether there was “enough of a population in midtown” to support the business.

“The energy in New York has been palpable this past month,” Holliday said. “On certain days of the week, we are reaching nearly 40% physical occupancy in our portfolio. … Companies regardless of whatever sort of flexible work model they’re going to have are still utilizing and mapping and consuming roughly the same amount of space or more in some cases. We don’t see that many downsizing.”

SL Green leased over 450,000 square feet via 44 deals signed in the third quarter, with nearly 1.4 million square feet leased year to date. Management said the majority of its buildings have undergone significant renovations over the years. The company this week also signed its first tenant, Chelsea Piers Fitness, with a 20-year lease spanning 55,780 square feet, at another one of its top-tier projects that’s still in development, the 1.4 million-square-foot 1 Madison Ave. across from Madison Square Park in the Midtown South area.

Chelsea Piers will make a “substantial investment” to make its second Manhattan location a “fitness destination,” Holliday said.

But even with some of its trophy properties getting interest, SL Green’s occupancy levels still suggested challenges facing Manhattan and the U.S. office market.

Occupancy in the company’s Manhattan same-store office portfolio was 93.1% in the third quarter, down from 93.6% in the second quarter. Excluding leases at One Vanderbilt, average tenant concessions were 8.8 months of free rent with a tenant improvement allowance of $77.63 per rentable square foot, with both metrics higher compared to the second quarter. Company management said it will make investments in amenities where it sees fit to attract tenants but said it also still likes to have space available to address what it describes as the “affordable” part of the market.

“We are less concerned about current physical occupancy and specific return-to-office dates, and more focused on the intent of companies to eventually return,” Michael Lewis, a Truist Securities analyst, said in a report. “We expect flight to quality to remain an important theme in the office sector.”

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