Jones Lang LaSalle


A New Look and Higher Expectations for a 70's-Style Building in Midtown
February 22, 2006
Square Feet
By TERRY PRISTIN

For more than three decades, a 41-story telephone company building adorned with vertical white marble stripes has stood opposite the western edge of Bryant Park. If all goes well next year, that structure, most recently known as the Verizon Building, will more or less disappear.
The building, which sold last year for $505 million, is not being torn down, however. Rather it is to morph into a more contemporary blue-green glass tower that will bear little resemblance to the original.

The recladding is part of a $260 million upgrade of the Verizon Building, at 1095 Avenue of the Americas, between 41st and 42nd Streets, that is intended to capitalize on the growing desirability of the neighborhood surrounding Bryant Park. The new owner, Equity Office Properties Trust, initially intended to spend $188 million on the renovation but ultimately decided that investing even more would enable the building to command top-dollar rents.
"Originally, when we looked at the building, we said, 'We believe the market is going to tighten substantially,' " said Richard D. Kincaid, chief executive of Equity Office, a real estate investment trust. "We also said, 'This is not the most attractive building.' " With extensive remodeling, including a new two-story lobby, he said, "you can turn it from a good building into one of the best buildings."

For Equity Office, the nation's largest office landlord, the investment in the Verizon Building is part of a new strategy that is intended to improve the performance of a company that has lagged far behind its major office REIT competitors for several years. Its dividend, once considered sacrosanct by its chairman, Sam Zell, was cut last year by 34 percent, to $1.32 a share annually. Adding to Equity Office's woes, the company, which is self-insured, reported $38.2 million in hurricane-related losses in Metairie, La., a New Orleans suburb.

To turn things around, Equity Office has reduced its holdings in weaker markets like Dallas, Houston and New Orleans, and has tried to establish a bigger presence in stronger markets like New York and Washington by acquiring underperforming buildings and making them more profitable. In 2005, the company sold $2.7 billion in assets. It currently has 620 buildings comprising 111 million square feet in 16 states and the District of Columbia, including 6.3 million square feet in Manhattan.

"They are certainly making great efforts to take the company forward," said Jim Sullivan, a senior analyst at Green Street Advisors, a research company in Newport Beach, Calif., that specializes in REIT's. Company officials say that occupancy across the office portfolio rose to 90.5 percent last year, from 87.7 percent in December 2004.

But Mr. Sullivan said the company was taking a risk with the Verizon Building. Donald E. Huffner, an Equity Office senior vice president who is in charge of the New York region, said annual rents were expected to average $85 a square foot, with an expected 8.5 percent rate of return.

But Mr. Sullivan said that to earn that much, the company would have to get $90 a square foot, considerably more than the going rate at other buildings. "Clearly there are some question marks as to whether they can pull this thing off," he said. "It's a complex project. New York is a high-cost place. Any error gets magnified."

Mitchell S. Steir, the chief executive of Studley, a brokerage firm that represents tenants, said that when the Verizon Building was put on the market, real estate specialists projected annual rents of $50 a square foot at the base of the building and $80 at the very top. "They're pricing a little ahead of where the market is," Mr. Steir said, referring to Equity Office. "The market is pretty healthy right now. But examples of rents in the $70 range are few and far between."

Rents at the Grace Building, opposite the north side of Bryant Park, are $70 or more a square foot, said Douglas Winshall, an executive vice president at Trizec Properties, the building's owner.

According to the CoStar Group, a commercial real estate information company, the average annual asking rent for the 159 buildings between Avenue of the Americas and Fifth Avenue from 40th Street to 50th Street is $55 a square foot.

But as rents have risen on the northern end of Avenue of the Americas, they have also been increasing around the jewel-like Bryant Park, which is gaining stature among rapidly expanding financial companies, said Mitchell Konsker, an executive vice president at Cushman & Wakefield. Mr. Konsker is seeking to lease 600,000 square feet of space at 522 Fifth Avenue, at 43rd Street, at $75 a square foot.

Landlords have been emboldened by the success of an elegant new 300,000-square-foot building at 505 Fifth Avenue, at the corner of 42nd Street, he said. Developed by Axel Stawski, the building, anchored by C.I.T., a financial services company, is getting annual rents of $85 to $90 a square foot, Mr. Konsker said.

Most notably, Bank of America and the developer Douglas Durst are building a 54-story tower at 42nd Street and Avenue of the Americas, just north of the Verizon Building. Mr. Durst, who also developed the Condé Nast building in Times Square, said he was asking $100 a square foot for the new building, known as One Bryant Park, which would put it in the same league as the city's top office addresses, like the General Motors Building.

"If we built this building 10 years ago, it would be a different story," said Mr. Durst, referring to One Bryant Park, which is expected to be completed in 2008. "The center of gravity has shifted tremendously."

Initially, Bank of America planned to occupy 1.1 million square feet in the new building. But now, Mr. Durst said, the bank is seeking an additional 300,000 to 500,000 square feet, either in One Bryant Park or someplace nearby. (A bank spokeswoman declined to confirm that the company was searching for more space, saying only, "We are continually growing our business.")

Equity Office, of course, would be happy if Bank of America decided to house some employees in the Verizon Building.

Completed in 1974, when Bryant Park was a crime-infested eyesore, 1095 Avenue of the Americas was built to bring a new switching station to Midtown Manhattan to improve service. Verizon will continue to own 20 percent of the building, including the seven floors with the switching station, but is moving its office personnel downtown.

The redevelopment team for the Verizon Building includes Moed de Armas & Shannon Architects, the firm that recently updated 450 Park Avenue, and Gensler, the company that is designing the new headquarters for The New York Times Company on Eighth Avenue, a building that is expected to compete for tenants with the Verizon Building and One Bryant Park.
The remodeling program will include new elevators and the landscaping of a 14,000-square-foot public plaza to the west of the building. The radiator units by the windows will be removed, adding 45,000 square feet of usable space and using the park view to better advantage, company officials said.

In fact, the head-on park view from the lower floors of the building is so picturesque that Mr. Huffner said he hoped to be able to charge more than he might otherwise for what is normally considered less-desirable space.

Mr. Konsker said the park would be a drawing card for tenants but was unlikely to add to the rent. "It will make the leasing go that much quicker," he said. "But I don't think you get a premium because they're looking at the park."

Copyright 2006The New York Times Company