Long Island office-leasing comeback stalls, especially for fancy class A space

The enduring popularity of remote work is hitting some office properties on the Island harder than others.

Three years into the pandemic, shifts in where and how Long Islanders work are taking a toll on the upper end of the office market: buildings considered class A in the real estate industry because they're new or revamped and offer amenities like cafes, gyms and outdoor spaces.

Overall, the amount of empty office space on the Island crept up last quarter to 9%, lower than the vacancy rate in New York City and the region's 10.1% rate in 2003, according to data from the real estate analytics firm CoStar.

But the vacancy rate has surpassed that and hit 12.7% for the class A segment of the market. Slightly less attractive offices — Class B — had a 9.1% vacancy rate, while unclassified and lower-tier spaces in the C and F class had a 4.7% vacancy rate, according to CoStar data from the end of last quarter analyzed by Newsday.

The upper echelons of the market cater to the white-collar, managerial teams more likely to cut the size of their workspace, commercial real estate experts said. Even before the pandemic, legal firms and banks approaching the end of yearslong leases discovered that they no longer needed physical libraries or computer server rooms, these experts said. Staff proved they could work from home early in the pandemic, and some of these firms responded by letting them telecommute part or all of the time.

Businesses are less intent on using large, polished spaces to showcase their brands because fewer clients are dropping by, according to Peter Curry, a partner at the law firm Farrell Fritz who focuses on commercial real estate.

Yet owners of class A space are upgrading their buildings and investing more in setting themselves apart. They’re planning capital improvements, subsidizing on-site food businesses and hosting everything from farmers market vendors to charity fundraisers in their lobbies. Owners and brokers say these efforts are appreciated by companies looking to coax workers back to the office. They report they’re already seeing a so-called flight to quality, in which companies surrounded by several options migrate to the more prestigious places.

“There are some companies … that could be attracted by those amenities. But the bottom line is the bottom line, actually, so there’s not a lot you can do,” said Curry, who is counsel to the Commercial Industrial Brokers Society of Long Island. “Every company that’s out there right now is trying to manage their expenses, and real estate is a big expense.”

A view from the top 

In Melville, a 77,500-square-foot building undergoing renovations and ready to be tailored to tenants' needs has been empty for more than a year, said Mark Hamer, president of Harvest Real Estate Services, Inc., which owns the site. He estimated six firms toured the building last year. The office, listed as class A on CoStar, has been available since last February, when ADI Global Distribution's lease expired at 263 Old Country Rd..

ADI, which wholesales security and audiovisual products, moved to a 30,000-square-foot space in Melville while modernizing its workplaces, according to spokeswoman Adrienne Zimoulis.

ADI's old building had an executive suite with a gym and showers and a lunchroom, but Hamer said his firm is doing a "whole new buildout" of the office and will plan the next amenity package based on the new tenant's preferences. The landlord is making the building more energy efficient by replacing the HVAC system, upgrading the lighting and installing touchless technology. Hamer said he is seeking $28 a square foot on an annual basis. 

“We’ve already shown it more in the last 2½ months than we did all of last year,” he said. “The tide is reversing.”

The scene in other segments 

A decades-older building in Bethpage, by contrast, has just a fraction of space available, according to Frank Zuckerbrot, co-managing partner of TZ Real Estate Properties LLC, which owns the 1055-1065 Stewart Ave. property. 

Just 12,500 square feet — or 5.7% — of the 216,000-square-foot building is available, an improvement from five years ago, when the building was largely empty, Zuckerbrot said. Aerospace company Northrop Grumman once used the space, which then housed the now-defunct Briarcliff College.

Allied Account Services signed a lease and the U.S. Citizenship and Immigration Services expanded during the pandemic. When fewer people were working in the office, TZ Real Estate Properties power-washed the exterior, fixed up the landscaping, built a new parking lot and started upgrading common areas, Zuckerbrot said.

The firm also added individual entrances to tenant spaces. People seem drawn to more compartmentalized offices, where they can control their own environment, Zuckerbrot said.

CoStar labeled 1055-1065 Stewart Ave. a class C property, but Zuckerbrot disputed that grade, describing it as "B plus product run like an A building" because of on-site, proactive management. 

Zuckerbrot is considering using the remaining 12,500 square feet to increase the number of small office suites rented to individual executives. 

“We have a very competitive price for the product that’s being delivered, and that matters today,” he said, declining to give the prices.

CoStar said asking rents there have been around $23.50 a square foot per year.

What the numbers say

Comparable buildings — those considered class B and C — were “showing positive momentum” on Long Island as early as last September, according to Moody’s Analytics, which tracks and analyzes commercial real estate and other industries. Since then, vacancies have become more widespread in class A spaces, CoStar data shows. Commercial real estate brokers and analysts may disagree on class rankings, which are somewhat subjective, but generally rate buildings higher the newer they are — and the more bells and whistles they contain. 

The A tier accounts for more than a quarter of all office space on the Island, according to CoStar. Even with a 12.7% vacancy rate, landlords were asking an average of $34.15 per square foot annually, according to CoStar data from last quarter. That’s up from $28.42 per square foot before the pandemic, when inflation isn’t taken into account.

By comparison, Class B buildings account for nearly half of the regional market and were asking for an average of $25.58 per square foot each year. 

The more expensive stock tends to cater to bigger, white-collar businesses, the type that trade goods or services beyond the region and across the nation or globe, according to Marcel Negret, a senior planner at the Regional Plan Association, a civic group focused on improving the economy and quality of life in the tristate area. Class A landlords' target audience includes industries that have more flexibility to telework: finance, insurance, management, information and other professional services firms, Negret said.

“That’s what’s explaining, at least in part, why some of the higher quality buildings are seeing higher vacancies,” he said.

Scooping up small firms

On the Island, the companies embracing remote work seem to be the bigger businesses, according to Tony Fromer, principal at We’re Associates Inc., which owns about 3.5 million square feet of both class A and B office space on the Island, according to CoStar. Newsday rents its offices from the We’re Group.

At We’re Group’s 300 Jericho Quadrangle, nearly one-third of the class A building or 100,000 square feet, is listed for sublease by Publishers Clearing House, according to a brochure on CoStar. Fromer said he wasn't sure how much of its space the sweepstakes and marketing company planned to reserve for its staff.

“Whatever is occurring to them is endemic to office tenants in general in that their footprint has changed based on how workers behave these days,” Fromer said.

Publishers Clearing House didn’t respond to requests for comment.

Many landlords say they’re marketing to companies cutting their office size. At 515 Broadhollow Rd. in Melville, owner Anthony Biancaniello said he encountered many of these firms while filling up 50,000 square feet of warehouse transformed into office space during the pandemic. MSC Industrial Supply was among those who moved into the revamped area. 

MSC, which distributes metalworking tools, abandoned its 170,000-square-foot headquarters and customer service center on Maxess Road and leased 26,000 square feet in Biancaniello’s building. The company noted in a December 2020 news release that staff had shown they could work from home, and largely preferred to do so. The office is available when needed — and employees can use an app to reserve a workspace or conference room, the news release said.

“We determined that our [former customer care center] in Melville is simply too large to accommodate this hybrid approach, so we have decided to relocate to a more suitable space just one mile away,” the company’s president and CEO Erik Gershwind said in a statement.

On their A game

Owners and brokers involved with class A space say the data doesn't depict the demand they're seeing from company executives eager to get staff back in the office. They believe premiere office spaces can help prompt that transition and are enhancing what they have to offer.

Many businesses want access to conference rooms, an eatery and a physical fitness center, said Jason Forte, senior vice president of RXR, which owns about 3.5 million square feet of office space in the region, nearly all of it class A, according to CoStar.

A 90% occupancy rate is on the horizon at the Omni, a class A building in Uniondale, Forte said. He said executives are drawn to its many amenities, including a cafeteria, a gym with a pool and an art gallery in the lobby.

Having food services in the building is so sought-after that landlords have subsidized these businesses when the eateries couldn’t make money because of decreased foot traffic, landlords said.

At 1 and 2 Jericho Plaza, two cafe spaces were handed over to one operator to maximize their margins, said Christopher DeLorenzo, executive vice president at The Birch Group, which owns the property. The development contains one class A and one class B building, according to CoStar. About 8% of the development is listed for sublease, according to CoStar, but excluding that, the buildings are about 92% occupied, DeLorenzo said.

“During the height of the pandemic, it was tens of thousands of dollars a month to provide subsidies to these guys [cafes],” said DeLorenzo. “We want to partner with these businesses to try to be part of the solution in getting their employees back. So we have food service, we have gyms, we have conference facilities."

RXR has expanded a "concierge" service called RXO, said senior adviser David Garten. RXO helped companies safely and comfortably transition back to the office after months of working remotely, he said. The team curated art installations, coordinated volunteer opportunities, brought farmers market vendors into building lobbies and worked with tenants to host events such as fundraisers and painting workshops, RXR said.

RXO makes returning to the office “so much more than just coming back to your cubicle,” Garten said.

On the average day, RXR's offices attract about 70% of occupants, compared to the roughly 85% seen before the pandemic, according to Forte. Offices have never been at 100% capacity because of workers who are on vacation, traveling for work or away for other reasons. 

"We've been ahead of the curve over the last 20 to 30 years with our buildings, where we've always had a full array of amenities," Forte said. Employers are "trying to provide a better work experience for their employees … and that's where the class A assets land."

By Sarina Trangle

sarina.trangle@newsday.comSarinaTrangle

Sarina Trangle covers affordability and cost of living issues and other business topics. She previously worked as an editor and reporter at amNewYork.