A Tale of Six Cities

Cross-town or cross-country, the search for better real estate deals is on.

New York is also the home of many of the private-equity players that are skewing the laws of supply and demand across the nation. Goodwin Procter’s Alex Randall, a real estate attorney and head negotiator for the firm’s office space, experienced this firsthand last year. After six months of negotiations, he was on the verge of signing a lease for a former Equity Office Properties Trust (EOP) building in Manhattan when The Blackstone Group acquired the site and demanded a 20 percent increase in rent, amounting to $4 million annually. “They literally told me on the phone, ‘We spent a lot of money for this building, so we have to charge high rents,’” says Randall. “I’d never heard that logic before.” Months later, he was looking for space in San Francisco and found the same phenomenon, with rents doubling as buildings on his short list were acquired by New York private-equity firms like Broadway Partners and an arm of Merrill Lynch. “It was the same dynamic, with out-of-town funds and investors buying the office towers, holding them off the market, and raising the rent, irrespective of supply and demand,” says Randall.

Still, for certain industries, there is no substitute for New York connections and culture. Financial services, media, and advertising firms are among those that can’t afford to be elsewhere. For other companies, the benefits of New York’s talent pool outweigh the headaches of dealing with the tough real estate market. Since moving its headquarters to Manhattan from Cleveland four years ago, executive recruiting firm CTPartners (formerly Christian & Timbers) has been able to hire 25 new partners and increase its revenue fivefold, says CEO Brian Sullivan.

The tech industry is also making inroads into the city; both Google and Yahoo have opened research facilities there in recent years. Meanwhile, New York mayor Michael Bloomberg is pushing to make the city attractive to biotech firms. He offered more than $13 million in city funds to help build the new East River Science Park, which broke ground in mid-October, plus tax incentives worth more than $250 million over 25 years.

How to cope with the sky-high rents? Experts say you won’t find space for less than around $40 per square foot anywhere in the city, but you may be able to trim costs by moving around a bit. Randall ultimately found a bigger site at a 15 percent discount to his original deal by moving across town to the new New York Times building, in a less upscale area. More subleased space, which usually goes at a discount to current rates, may also become available if investment banks continue their layoffs as they retrench from subprime losses.

There is also some relief coming on the supply side; 6.2 million square feet of new space is expected in the next two years, and more after that, including the Freedom Towers, as the rebuilt World Trade Center will be known. For 2008, PPR forecasts that rents will rise by only 4 percent — a deal by New York standards.

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