GlobeSt.com: Talk about what the market looked like this past year from a tenant rep firm's perspective.

Manley: The big story in real estate for 2009 was job losses. There have been about 140,000 jobs lost in New York City. If we use the standard rule of thumb of 200 square feet per person, that translate into about 28 million square feet of space. That adds 7% to the vacancy rate by itself, even before we talk about gray space and companies not laying people off but deciding they don't need to have all of them in New York.

Another theme for '09 was that at a certain point, the dialogue from the building owner's point of view changed from "this is a blip" and "we're going to wait it out" to "we've got a real problem here." The sale of 1540 Broadway was an iconic event that captured a lot of it, because that building sold for roughly one-third of what Macklowe Properties had paid for it in 2007. That was followed by the sale of Worldwide Plaza, again for about one-third. Even if you argue that there were problems specific to those buildings, one can still say they were representative of a period in which there was a huge amount of froth in the market, driven by irrational exuberance and the free flow of capital.

Another indication of the general real estate market is Willis Tower in Chicago. It's phenomenal that a tenant occupying 4% of the space has a building named for it. That's a sign confirming the shift in the market. More locally, you had the Orrick deal at Black Rock, in which they got the space for about half of what had been asked not so long ago.

GlobeSt.com: Along with deals on rents, what else are tenants looking for in class A properties?

Manley: Tenants are much more savvy and demanding about building systems. People want good value and to know that the buildings are being run efficiently, but they really want to know they're going to have the electrical capacity they need and be able to support their IT infrastructure. Tenants are looking for a higher level of service. While an address may still have cache, you've got to go beyond that.

Are landlords at class A properties responding to these new tenant requirements?

Manley: That's tough to say, because some of the flaws are inherent in the design of the existing infrastructure. The cost to modify that is huge. It all gets to be very nitty-gritty and granular when you look at specific buildings, and to fix some of them is not easy. So landlords are trying to be responsive in acknowledging that tenants are intent upon improved building systems, and more receptive to these issues in lease negotiations.

There's no bright line where all of this suddenly became more important to tenants and landlords became more receptive, but there are a couple of issues driving this. One is the tremendous importance of broadband communications and having your systems up, together with a total package of systems—electricity, HVAC, lighting—that supports that. But it's also the drive for green. And even though a lot of people talking about green are not about environmentalism, there is an increasing drive for greater efficiency in some of these systems, and folks are becoming aware of more choice.

Five years ago, you might have had a Park Avenue address without even a discussion about the tradeoffs, but now people are having those discussions. One of our financial services clients has been absolutely wedded for many years to the idea of a Park Avenue location, but now they're saying "It's going to cost us millions to rip up the ceiling, put in new duct work, etc." And it doesn't work for them at this point. So the discussions about alternatives are much more serious, and the discussions about systems, instead of being an afterthought, are coming up much earlier.

Would it be fair to say that this is less about greening the space and more about efficiency and cost-effectiveness?

Manley: That's a primary driver for a majority of tenants. There's also a desire for employees to be comfortable, and that may or may not coincide with a concern about being green. But sometimes it does.

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Paul Bubny

Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.

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