I posted this in the One vanderbilt thread. It's a good read on the midtown east rezoning, and how and why these new office towers are lining up to reshape the skyline.
https://www.crainsnewyork.com/featur...iness-district
The inside story of the city's elite business district
GREG DAVID
May 5, 2019
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The effort to keep Park Avenue the most prestigious business district in the city, if not the world, began April 20, 2010, at the Odeon restaurant in Tribeca.
Mary Ann Tighe, then chairwoman of the Real Estate Board of New York, met the powerful head of City Planning, Amanda Burden, for lunch. “What should
we be thinking about that we aren’t?” Burden asked.It was the kind of question Burden posed often, and Tighe was ready. The office buildings in the
heart of Midtown were uncompetitive, she replied, because tenants no longer wanted to be in structures built three-quarters of a century ago. And zoning laws made it economically unfeasible to replace them
Almost exactly 10 years after that lunch, the developer SL Green will cut the ribbon on 1 Vanderbilt, a77-story, $3.3 billion tower across from Grand Central Terminal that is rapidly filling up with financial-services and law firms.By then JPMorgan Chase will be on the verge of the tallest teardown ever: the demolition of its 52-story headquarters on Park Avenue between East 47th and East 49th streets to make way for a 70-story tower for 15,000 employees. And a consortium of real estate firms and the Hyatt Corp. will be finishing their plan for a soaring tower—this one with offices, a hotel and retail—to replace the Donald Trump–built Grand Hyatt.
The three projects all stemmed from that lunch, which gave rise to one of the most tortured rezoning efforts in city history. The behind-the-scenes story of Midtown East spotlights how zoning happens in New York amid conflicting pressures from real estate interests, planners, politicians and communities. It is also the story of a determined effort by the Bloomberg administration that ended in a crushing defeat and how the de Blasio administration and city planners revived and delivered it.
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The saga also illustrates how important zoning is. In this case, it was crippling a crucial business district but, when updated, unleashed private-sector forces that could save it.The stakes were high. “East Midtown contributes 10% of our real estate tax base and contains our most prestigious corporate addresses: Fifth Avenue, Park Avenue, Madison Avenue, Lexington Avenue,” said Carl Weisbrod, who succeeded Burden at City Planning. “Its continued health is essential to the economy of the city.”
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It was news to Burden that Park Avenue was in trouble. For several days after her lunch with Tighe, she checked it out for herself. She focused on Vanderbilt, the five-block street on the west side of Grand Central, and saw old, undistinguished buildings and a pedestrian corridor that was far from inviting.
To find out if Tighe was right, she put Edith Hsu-Chen, the head of the Manhattan planning office, in charge of a team. Hsu-Chen would be the linchpin of the effort through two administrations.
Tighe shared data and analysis from the research unit at CBRE, where she was New York president. Hsu-Chen’s group dug into its own sources and quietly sounded out key property owners. Their conclusion matched Tighe’s: The buildings were too old, rents were declining, and vacancy rates were rising.
The problem was that the buildings along Park Avenue had all gone up before a 1961 downzoning. Any that were torn down could be replaced only by something smaller, so no one did anything.
Tighe wanted new buildings to be allowed the same density as what they replaced. But to the planners, that violated the basic principles of zoning. Burden was most interested in Vanderbilt Avenue. Eventually her agency proposed a rezoning of the entire area, with new development rights—mostly created by the city—to permit taller, denser towers. Proceeds from the sale of air rights would pay for transit and other public improvements.
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Mayor Michael Bloomberg announced the initiative in an early 2012 speech. In the audience, Councilman Daniel Garodnick, who represented the area, was taken aback. “I had not heard about, been approached about or consulted about it,” he said.
The mayor’s aides began wooing Garodnick after the speech, but the breach of political protocol would hang over negotiations. And while the administration had rezoned much of the city, losing only one fight in 10 years, it didn’t take long for its Midtown plan to come under siege.
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Modeled on what the administration had done at Hudson Yards, the city would sell air rights for a fixed price, as could the religious institutions. The price would be periodically adjusted by an as-yet-unspecified panel.
Garodnick didn’t think much of the scheme. “Even a real estate novice like me would know that air rights would not be priced at the same level on 39th and Third and 57th and Park,” he recalled. Key players in real estate shared his view but didn’t make an issue of it, fearing that would endanger the entire plan.
Deputy Mayor of Economic Development Robert Steel, tasked with selling the proposal, called attention to the opportunities the city was missing.
“I take CEOs who are thinking about moving their companies to New York on a tour of the area and they can’t find any acceptable space,” he said at a Crain’s forum.
Steel also committed a blunder, accepting REBNY’s suggestion that hotels be allowed in the new buildings. That moved Peter Ward, the powerful head of the hotel workers union, to demand that any new hotels in the district get a special permit from the City Council—a de facto requirement that they be unionized. The administration and REBNY opposed that idea.
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Garodnick, who through council tradition ultimately would decide the measure’s fate, was not sold. The administration assumed it could win him over by offering further sweeteners for the community, as it had done with so many zoning changes. But Garodnick was running for council speaker, and upsetting the plan’s opponents would impair that effort.
Bill de Blasio had won the Democratic mayoral primary, was influencing the speaker’s race and was not inclined to see Bloomberg get a big win on his way out. In November 2013, on the night before the scheduled council vote, Burden and Hsu-Chen worked frantically to salvage a compromise—a narrower change for the Vanderbilt corridor. Steel blocked their attempts, and the administration withdrew the plan.Mayor-elect de Blasio announced he would restart the effort upon taking office. Garodnick was confident. “I was the local councilman,” he said, “and I knew that it was the right thing to do.”
But the setback caused casualties. SL Green’s One Vanderbilt was in limbo. An ambitious, long-delayed plan by David Levinson to take down and rebuild 425 Park Ave. also was paralyzed.
Indeed, the future of Park Avenue itself was again in doubt.Hsu-Chen was devastated. “We had all worked so hard on Midtown East,” she recalled. “It was a huge disappointment.” With City Hall changing hands, she thought it might be time to leave city planning.
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The rezoning of Midtown East was saved by Dolan and Weisbrod.
Shortly after taking office, de Blasio made a courtesy call to the cardinal at his residence. Prompted by his staff, Dolan made his pitch: The Archdiocese desperately needed to sell St. Patrick’s estimated 1.1 million square feet of air rights to pay for its renovation and other expenses. The mayor promised he would push a plan through within a year.
The mayor also unexpectedly named Weisbrod, who had worked on some of the city’s most important real estate issues since the 1980s, to lead City Planning. At the top of Weisbrod’s to-do list was meeting with Hsu-Chen. They had a rapport; she had been City Planning’s point person on a rezoning of Hudson Square when Weisbrod ran Trinity Church’s real estate portfolio.
“Let’s do East Midtown again. I know you want to,” Weisbrod said to her. Hsu- Chen signed on.
Weisbrod made two immediate changes. He proposed a steering committee with all the interested parties, chaired by Garodnick and Gale Brewer, the longtime West Side councilwoman who had just been elected Manhattan borough president. Brewer hadn’t paid much attention to the first attempt. But as borough president, she could help make or break the new effort.
Weisbrod also embraced Burden’s idea of starting with the Vanderbilt corridor to save the SL Green project and provide a template for the broader rezoning.
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De Blasio missed the deadline he promised Dolan, but in May 2015 the City Council approved the Vanderbilt corridor rezoning after SL Green agreed to make $220 million worth of improvements to Grand Central and do the work itself to sidestep the much-derided MTA construction process.
As 2017 began, Weisbrod announced the broader rezoning was ready for public review at the same time he said he would step down. The community boards voted against the plan, although without the brimstone that theybrought to Bloomberg’s. Brewer approved it.
A final hitch emerged when Brewer and Garodnick demanded an increase to 10,000 square feet in the privately owned public spaces to be required of new buildings. The planners thought it wrongheaded, but it went through. It later would be a stumbling block for JP Morgan Chase.
On Aug. 9, 2017, the City Council passed the rezoning.
Hsu-Chen was often asked during the struggle why she was so focused on Midtown East. “The public sector has put billions and billions of dollars into the infrastructure of the area,” she said. “Why should we walk away from more than a century of investment and let the business district decline?”
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The city acted too late for Levinson but just in time for SL Green. For JPMorgan CEO Jamie Dimon and a group led by the Hyatt Corp. and two local real estate firms, the rezoning was an opportunity.
Levinson took control of the Park Avenue block between East 55th and East 56th streets 16 years ago and later began exploring how to build a tower there.
Tighe was part of the effort, which is what brought her to the problem on Park Avenue.
But when the Bloomberg plan was rejected in 2013, Levinson could wait no longer. He used a loophole allowing for a new office building of the same 675,000 square feet that 425 Park Ave. had as long as he retained 25% of the structural steel. Tying the new and old steel together was quite a challenge and raised the cost, reportedly to about $1 billion. But his 47-story tower will be completed late next year with hedge fund Citadel as the anchor tenant—at a record-setting rent.
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Marc Holliday’s effort to remake Midtown East goes back even further. He and Andrew Mathias joined SL Green in 1998 and teamed with founder Stephen Green to remake the company: moving from Class B buildings south of Midtown’s core area to Class A buildings around Grand Central. Beginning in 2001, he began acquiring the East 42nd Street block bounded by Vanderbilt and Madison. The process took nine years.
Holliday, who became CEO in 2004, toyed with the idea of tearing down the buildings, but the allowed density was never enough to justify it. When he got wind of the rezoning idea, however, he threw himself into the effort.
“This area is New York’s most important submarket, with the greatest collection of Fortune 500 companies anywhere,” he said. “To make it work, the city needed something tangible to rally support around the rezoning and a project to make it real, not theoretical.”
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He did just that. He inked TD Bank as the anchor tenant, came up with a design and made it clear he would pay for transit upgrades. The defeat of the Bloomberg plan was a blow, but within months of de Blasio taking office, Weisbrod and Alicia Glen, Steel’s successor as deputy mayor, assured him they would push for his Vanderbilt project.
Today it is more than 70 stories and rising, eight weeks ahead of schedule and 57% leased, with more tenants in the pipeline. Its projected $1.1 billion
construction cost has been cut by more than $100 million.
Most important, SL Green is commanding top rents. Middle floors are going for $165 per square foot, and asking prices for the penthouse begin at $190. New leases in revamped buildings along Park Avenue range from $80 to $120.
The $220 million SL Green committed for transit improvements is more than it would have cost to simply buy air rights. It doesn’t faze Holliday. “We own 15 million square feet in and around Grand Central,” he said. “The transit improvements are of value for all our holdings.”
Holliday expects to cut the ribbon on the 1.7 million-square-foot building Aug. 4, 2020. It will be the tangible payoff for all the work the rezoning required.
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It has become clear that the threat to the district was real. The shimmering, new Hudson Yards development on the Far West Side has lured from Midtown the world’s largest money manager, BlackRock, along with Wells Fargo and a series of top law firms led by Boies Schiller Flexner.
Five years ago J.P. Morgan also had its eyes on Hudson Yards, working up a $6.5 billion scheme to build two adjacent towers on the Far West Side. When
The New York Times reported that it was seeking more than $1 billion in concessions from the city and the state for the project, possibly in addition to the incentives it was entitled to, the political opposition was so intense that the bank quickly said it would remain on Park Avenue.
Now Dimon, known as a parsimonious CEO, has embraced the most expensive option possible for a new headquarters: He will relocate the 6,000 people who work at 270 Park Ave. into other locations, tear down the building and then construct a new one, 70 stories high, to accommodate 15,000 employees on the open floors so in demand by CEOs trying to reinvent their companies.
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The air rights he is buying will generate $40 million for transit and other improvements. As with all buildings in Midtown East, he won’t get a dime in tax breaks.
Chase would not comment for this story, but Dimon has told others that putting all his people in one building without giving up the transportation advantages of the current site will generate profits that will more than pay for the building. With a management overhaul in recent weeks designed to groom someone to succeed him in five years, it is possible that the new headquarters will be his gift to the next CEO.
Chase has already worked through one major obstacle: The rezoning’s language on privately owned public spaces requires a park smack in the middle of its tower. All the key players have agreed to a zoning change allowing the amenity to instead be located on Madison Avenue, but other difficulties could come up despite strong city support for the plan.
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A new tower planned for the site of the Grand Hyatt New York, Donald Trump’s original claim to fame, will take even longer. The rezoning piqued the interest of the Hyatt Corp., which was facing the prospect that it would have to renovate the 1,300-room hotel in the near future even though its corporate strategy was to sell off its real estate while maintaining management contracts.
It also was enticing to MSD Partners and TF Cornerstone, which had become partners with Argent Ventures in the air rights available from Grand Central. One Vanderbilt’s strong leasing at high rents made the economics attractive too.
With the same direct access to Grand Central that One Vanderbilt will have, the Hyatt location had been on some people’s lists of potential development sites. But the subway station cuts diagonally under the hotel, and the building’s columns run through it, making construction of a new edifice akin to open-heart surgery.
The plan, which was publicly revealed in February and now includes RXR Realty, faces daunting impediments in addition to the construction challenges.
The real estate firms must ink a final deal with Hyatt; decide on the right mix of office, hotel and retail and how to mass the building; and reach an agreement with the MTA that includes transit improvements, especially at the overcrowded subway station. They will need to meet other requirements of the Midtown East zoning as well.
The project’s cost will almost certainly be in the $3 billion territory of One Vanderbilt.
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Another development in the rezoned area is a 1,500-foot spire that Harry Macklowe is building across from St. Patrick’s Cathedral, though it cannot be attributed to the zoning change because he was already entitled to buy air rights directly from the church.
But other landlords have been compelled by the rezoning to act, according to
real estate brokers.
Pricey renovations of Midtown East office buildings are underway at 237 Park Ave., 277 Park Ave., 280 Park Ave., 399 Park Ave. and 390 Madison Ave. The Stahl Organization is spending $100 million on 277 Park Ave., and Cushman, its leasing agent, has inked deals with Chase and another major financial services firm.
“Since One Vanderbilt and 270 Park [Levinson’s building] got underway, there has been a significant flurry of activity,” says Mark Boisi, executive vice chairman at Cushman. He says the activity is the strongest since the 1960s.
Boisi should know. His father headed the real estate operation of the New York Central Railroad and was instrumental in using air rights to transform Park Avenue from residential to office buildings.
However, those buildings still have the intrusive columns and low ceilings that are out of favor. As the Chase and Hyatt examples show, taking advantage of the Midtown East rezoning is a Herculean task. Only one or two more such projects are likely to be undertaken in the next decade.
Most owners will instead hope that the unparalleled location and transportation—together with the cachet restored by the new buildings—will
outweigh the turnoff of archaic space.
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Brewer said the rezoning has given developers certainty while producing hundreds of millions of dollars for public improvements. Garodnick asserted that the bottom line has been exactly what was promised.
“If the goal was to inspire growth, attract new development and replace older, less competitive buildings with new Class A office space, this is already a great success,” he said. “And after only a year and a half.”
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NEW YORK is Back!
“Office buildings are our factories – whether for tech, creative or traditional industries we must continue to grow our modern factories to create new jobs,” said United States Senator Chuck Schumer.
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