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Wednesday, August 8, 2012

‘Buildings in Buildings’ Benefit Renter and Landlord

When WeWork began rapidly expanding in Manhattan two years ago, the business center company initially leased four entire buildings, where it in turn prepared and rented office space to small businesses, entrepreneurs and freelancers.

But at its two newest locations, WeWork went another route. Instead of leasing an entire building, the company leased an independent chunk of space with its own entrance, lobby and elevators within an office building, a situation often referred to in the real estate industry as “a building within a building.”

That way, WeWork gets all the benefits of leasing or owning a building — such as reinforcing its identity with exterior signs and controlling its security — but possibly at a lower price, real estate brokers said.

WeWork’s newest offices are at 175 Varick Street in SoHo, where rents are about $40 a square foot, and 261 Madison Avenue in Midtown, with asking rents of about $46 a square foot. The rates do not differ much from what it pays elsewhere, but it can have the perks a landlord can provide to a larger building without sacrificing privacy.

Office buildings with a building-within-a-building feature can be few and far between, real estate brokers said. Some examples, which range from high-rise towers to warehouse buildings, include: 330 Madison Avenue, Park Avenue Tower and 469 Seventh Avenue, all in Midtown; 11 Madison Avenue in Midtown South; 80 West End Avenue on the Upper West Side; and 550 Washington Street in Lower Manhattan.

Buildings in Buildings’Renter and Landlord in Madison Avenue, looking north from 40th Street
Madison Avenue, looking north from 40th Street (Photo credit: Wikipedia)
Tenants with separate entrances in these buildings have more privacy while benefiting from being in a larger building that can provide shared amenities, like a cafeteria. Landlords, in turn, can rely on having larger tenants, who might be willing to sign longer-term leases and who might eventually expand in the building.

While WeWork’s new location in SoHo is being retrofitted to create a second lobby and an entrance from what originally was a loading dock and an unimposing side entrance, some buildings have been designed to accommodate a building within a building.

Extell Development Company’s International Gem Tower at 50 West 47th Street in Midtown, for example, was constructed with a building within a building as an option, and Extell recently decided to set aside a total of 292,000 square feet on floors 22 through 34 to be leased as a chunk of space with its own lobby, elevators and entrance at 55 West 46th Street, said Alan Wildes, an executive director with the commercial brokerage Cushman & Wakefield, who is leasing the space.

While most of the space in the International Gem Tower had been sold as commercial condominiums, Mr. Wildes said that a shift in the commercial office market, in which tenants have embarked on a “flight to quality” in search of buildings with better service, security and amenities, persuaded the owners to lease the remaining space in the tower.

“The building-within-a-building concept has become more in vogue, because you’re able to accommodate higher-traffic tenancies and tenancies that wish to have their own identity or a little more exclusivity,” he said. “It’s become in vogue, especially as landlords try to recapture space that otherwise was not being used to its highest and best use.”

Not only will the space at 55 West 46th have its own entrance, lobby and elevators, it is also separate operationally, so tenants can control their electricity use, heating, ventilation and air-conditioning. Rents start around $95 a square foot. “The type of situation we offer really has to be planned ahead of time,” Mr. Wildes said. “It’s a lot more difficult to be able to retrofit a building.”

Another tower that was planned in the early 1980s as a building within a building is the 17-story Forest Hills Tower at 118-35 Queens Boulevard in Queens. Initially, ConEdison leased the 225,000-square-foot building within a building, followed by the cable company RCN Corporation and then JetBlue, said Kenneth Siegel, a managing director with the commercial brokerage Jones Lang LaSalle.

“This is a fairly unique situation,” Mr. Siegel said. “Not only does the tenant get the identity and the entrance, but then they also get to potentially operate the building, run their systems and be able to manage their costs that way as well.”

One tenant benefit of the building-within-a-building feature is the ability to expand without having to go outside the building, he said. As it grew, JetBlue took two additional floors in the Forest Hills Tower, before moving to a different location this spring, he said. “One of the clear benefits of doing something like this is tenants need to change over time,” he said. “If the tenant rents a whole building somewhere, they’ve got to go outside” if they need more space.

Another benefit to a tenant taking a building within a building is that a company can often stay on fewer floors, thus remaining less vertical and more collaborative than it would be in its own building, Mr. Siegel said. “Most tenants tend to rather be on fewer floors than more floors,” he said.

Because a tenant taking a building within a building is in a larger building with other tenants, a critical mass is possible to make it financially feasible for the landlord to provide more amenities, Mr. Siegel said.

Landlords enjoy clear benefits too, which is one reason some landlords are considering offering buildings within a building, said Glenn Markman, an executive vice president with Cushman & Wakefield, who has consulted on three conversions of office towers to a building-within-a-building format, the latest at Two MetroTech Center in Brooklyn.

Besides recapturing space that is not fully used, landlords can control the flow of traffic better, he said. A higher-traffic tenant can have its own lobby and elevators, minimizing wear on the building’s main lobby and elevators.

Because the tenants that might take a building in a building tend to be larger, they may stay in place longer, particularly if the space has been highly customized, he said. At Two MetroTech, the Polytechnic Institute of New York University signed a 15-year lease for about 90,000 square feet on two floors with a separate entrance, lobby and elevators.

The university’s entrance and lobby are in a storefront space that had been vacant and that is around the corner from the main entrance. The university’s two floors will house administrative and faculty offices, but also classrooms, which will require changing of its certificate of occupancy, Mr. Markman said.

“These leases tend to be long, but the landlord will have maybe a more leasable building the next go-around, since you’ve set up the building-within-a-building concept,” he said.

The conversion of 75,000 square feet of 175 Varick into a building in a building worked because the structure had a side-street freight entrance that was not fully used and had little retail value, said Martin Meyer, a vice chairman at the commercial brokerage Colliers International, who consulted on the conversion. He said that the concept generally works better in a corner building or one with a side-street entrance, because landlords would be reluctant to give up a prime retail site for a second entrance.

WeWork is renovating its 3,000-square-foot lobby off Charleton Street to provide a loungelike atmosphere with a pool table and games, plus a small restaurant for its members, said Adam Neumann, a co-founder of WeWork. The lobby will capture the identity of WeWork, which is anticorporate and countercultural, and let its members move in and out of the building in a secure fashion, he said. The building’s main lobby is much simpler, with little more than a security desk and the building’s original Art Deco design.

He described WeWork’s lobby as “cool and collaborative — different from any lobby that’s ever existed in the city.” He said his company is “excited to be able to curate and control the environment that we create, because most lobbies in the city all look the same.”

Taken from: http://www.nytimes.com/2012/08/08/realestate/commercial/buildings-in-buildings-offer-benefits-for-tenants-and-landlords.html
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