Success in NYC’s Office Market Means Getting Granular About Location

KPG Funds CEO Greg Kraut says that the office market is “back.” But that doesn’t mean everywhere in the country or even in a given city. Without more specific data, investments can quickly go bad.

“I don’t know if it’s back 100%,” Kraut tells GlobeSt.com. I’m pretty sure it’s back 90%.” But that’s only in highly specific areas.

KPG focuses solely on New York City, but to them that’s really many markets. “I only invest in certain submarkets where I know there is trending tenant demand and in areas that there is not the type of supply we create,” Kraut tells GlobeSt.com.

The firm breaks out the city into submarkets and collects extensive data to show demand in each of them. “We use that type of data to inform us where we want to buy and where we want to put the money,” adds Kraut. “You can buy a building for a dollar but if there aren’t tenants that don’t want to lease the space, it doesn’t matter. Then it’s a block-by-block look at where tenants want to be. A lot of out-of-town investors think they understand New York, but I’ve seen time after time they get burned by not having an operation at ground level. Really a cautionary tale.”

The level of detail is significant, according to data he sent to GlobeSt.com. The single location category of “Midtown” becomes 11 different submarkets. Then there are the five subdivisions of Midtown South and three for Downtown. Across 18 different submarkets, the change in tenant demand ranged from -31.2% to +12.5% and the three largest drops were in the four Tier I areas. The numbers were significantly different from the last quarter of 2021.

Critical to this type of analysis is an understanding of current dynamics. “Because the residential pricing has come down a bit over the last year, you see younger people coming back to the city,” he says. “We’re seeing the competition for talent still very strong in New York City. If you have a mid-sized company, it’s impossible to grow without everybody in the office. It may not be five times a week, it may be three times a week, and regardless, you still need space for them.”

Complicating that is ongoing competition for space. “If you look at the top five firms in New York City taking space, they’re expanding,” says Kraut. “They’re going ahead with their plans.” As they grab space, it won’t be available to others.

At the same time, companies need to attract talent, which means updated facilities. “Only 30% of buildings between Canal Street and 34 St have been renovated in the last 30 years,” he says. KPG provides office space that is more attractive and comfortable than many of the apartments younger workers can afford. “We build and design offices that are nicer than my house. In our new properties we’re putting in lactation rooms for women, meditation pods, we put in collapsible accordion conference rooms, so you can open up the home space for different uses, so adaptable use within their space. We put a lot of emphasis on mobility and people’s smartphones. You walk up to the door [and] it opens for you.” 

And then they choose areas that are relatively affordable for tenants. “I can’t afford to spend $120 a square foot,” says Kraut. “I can go to the financial district and pay $50.” Success for landlords has increasingly become finding the right balance among price, amenities, demographics, and demand.