3 Real Estate Trends Facing New York City Hedge Funds
The following article is part of our Hedge Fund Insiders Article Series and was contributed by CBRE Group, Inc. Read more articles from the Series HERE.
As a team focused exclusively on advising hedge funds on their strategic real estate planning, we have observed several trends continuing to proliferate in the market. Below are three real estate-related issues relevant to all hedge funds.
Increasing Construction Costs
Construction costs for office interiors throughout New York City are rapidly increasing and firms that built space 5–10 years ago will find that overall expenditures for the same quality installation have increased 30–40% based on benchmark construction cost data across NYC. Although benchmarking numbers are not available specifically for hedge fund construction, high-end design details like custom millwork and architectural metal and glass are often a significant part of the design and are seeing the most rapid appreciation in cost, driving even more significant increases specific to hedge funds. Additionally, these premium and other critical trades such as HVAC and electrical are in high demand and can cause scheduling delays, pushing associated costs higher than ever.
It is crucial for hedge funds to have an owner’s rep / project manager advisor involved to ensure projects are appropriately budgeted from the initial due diligence phase, assessed on a project-by-project basis throughout the site selection process, and effectively implemented during the design and construction of the selected space.
Strong Preference for New Construction
The average age of a Midtown building is 62 years old. Older buildings suffer from inefficiencies due to frequency of columns and column spacing, reduced light and air from smaller and less frequent windows, low ceiling heights, expensive overtime HVAC, and other infrastructure limitations. As a result of these challenges, demand for newer product is significant.
However, challenging Manhattan development economics make assembling development sites and demolishing existing buildings prohibitive. Of the 20.5 million rentable square feet of available space in Midtown, only 11% is in buildings constructed after 1990. Pricing for the newest buildings is significantly higher than comparable older buildings (anecdotally 20–40%) and in multiple cases, those locations are outside of the traditional areas of preference for hedge funds.
Decision-makers leading the space search will find, however, that a significant portion of the rental rate premium can often be offset by leasing less space through improved efficiency and employee willingness to sacrifice the size of individual work spaces in order to enjoy the new building environment. Some of the newer buildings with significant vacancy like 7 Bryant Park and Tower 46 warrant a second look and in many cases, a test fit—despite the possible presence of initial sticker shock.
Geographic Parameters Expanding
With a significant number of hedge fund principals now choosing to live in Tribeca, SoHo and other Downtown neighborhoods over more traditional locations on the Upper East or Upper West Side, geographic parameters for hedge fund offices have broadened. While historically many funds would consider alternatives to Midtown during the initial part of their searches, a lack of accessibility for investors and insufficient infrastructure almost always eliminated buildings south of the Grand Central submarket from consideration.
Now, with several new buildings completed, hedge funds have alternatives with Class A infrastructure in these vibrant 24/7 neighborhoods. For example, following IBM Watson’s commitment to anchor 51 Astor Place, a significant portion of the balance of the building has been leased to notable funds such as Tudor Investment Corporation, Claren Road Asset Management, Maple Lane and Spark Capital.
Noteworthy submarkets with new and redeveloped buildings in the pipeline include Soho and the Meatpacking District, which are already home to prominent funds such as Anchorage and Two Sigma. Additionally, the rapidly growing tech industry has favored neighborhoods with classic and loft-like architecture, such as Union, Square, Flatiron and NoMad. This has driven rising prices and landlords have invested to upgrade their infrastructure creating new buildings now suitable for hedge funds.
While investor accessibility continues to be a concern for newer funds, more established groups have the flexibility to broaden their search. As more high-profile firms take space in the neighborhoods between Canal Street and 34th Street, we anticipate hedge funds will continue to expand outside the traditional Midtown market.
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Ben Friedland is an Executive Vice President in the New York Office of CBRE. Throughout his 15+ years at CBRE, Ben has developed exclusive long-term relationships with many of the world’s leading hedge fund and private equity firms. Ben’s niche industry expertise and client base has earned him consistent recognition as one of CBRE’s top producers and frequent quotes in major news publications.
Michael Movshovich is a First Vice President in CBRE’s Midtown Manhattan office. Since joining CBRE in 2007, Michael has developed expertise and extensive track record advising hedge funds and private equity firms on their office space needs. Michael has distinguished himself as a trusted advisor and market expert within CBRE and the hedge fund/PE industries.
Taylor Scheinman is a Senior Associate in CBRE’s Midtown Manhattan office. After spending 5 years at Newmark Grubb Knight Frank, Taylor joined CBRE in 2015 and specializes in advising hedge funds and boutique investment firms on their long-term real estate decisions. Taylor is an expert in both the traditional Midtown sub-markets as well as emerging areas south of 34th street that has become an area of focus for established funds.
