Office Developers' Optimism For Long Island City Faces Brutal Reality Check

The pain in Manhattan's office market is reverberating out to Long Island City, a market long pitched to tenants as a place to lease a high-end building at a discount.

Leasing has slowed across the city, occupancy remains low and some office owners are buckling under a brutal financing environment — and Long Island City is no exception.

Vacancy in Class-A buildings in the area was 43.1% at the end of 2022, according to Cushman & Wakefield, while overall vacancy hit a new record of 28.6%. Rents fell 7% from the year before, while office take-up was negative 1M SF, a two-year low, according to the brokerage.

That nearly half of the high-end space in the market is sitting empty reflects the optimism over a wave of demand investors felt, as evidenced by the flurry of office renovation and development in the area in recent years.

But without that robust demand — as well as acute competition coming from sublease space in Manhattan — many owners are operating under a different, much gloomier, scenario than predicted.

“In 2016, 2017, everybody was converting Long Island City warehouse buildings to office buildings because the office market in Manhattan was just getting too expensive,” First Pioneer Properties President Suresh Sani said.

First Pioneer executed a $15M renovation of 33-02 Skillman Ave., converting it from industrial to office. Today, one floor out of six is currently leased, though Sani said there is a lot of interest in the other floors.

“You drive on Long Island Expressway leaving the Midtown Tunnel and head towards Long Island, you can see four or five buildings that have been redeveloped … Austell Place, you can look right through it,” he said. “Unfortunately our building, having just one of six floors rented, you can look right through it too.”

Four years ago, however, LIC owners were singing a different tune. Amazon’s decision to put a headquarters in the neighborhood sparked widespread belief there would be voracious demand from auxiliary companies flocking to the area. It was just a few months between Amazon’s November 2018 decision and the firm’s spectacular cancellation on Valentine's Day 2019, but the impact is still being felt to some extent, local officials said.

“I think people have moved on at this point, and they're not stuck in the bitterness of it,” said Laura Rothrock, the president of Long Island City Partnership. “But I think there is, a thought of like, ‘What could have been if Amazon did come here?’”

Some don’t have to stretch their imaginations too far. Last month, BentallGreenOak and Related Fund Management agreed to hand back the keys to their The Point LIC complex after they defaulted on their mortgage on two buildings, the Paragon Building at 2100 49th Ave. and the Blanchard Building at 2109 Borden Ave.

Both buildings are largely vacant, but when Amazon was heading for the area, Altice was set to move to the Paragon, signing a letter of intent, The Real Deal reported. When the deal fell apart, Altice decided to stay at Court Square.

The investors are not the ones backing away from the area. RXR Realty and Titan Machine in 2021 scored city council approval to build a 321K SF commercial development spanning retail, office and industrial space at 42-11 Ninth St., but the project, a joint venture, is no longer moving ahead.

“While RXR will not be moving forward with this project, we continue to believe in the long-term potential for commercial office growth outside of Manhattan,” RXR Executive Vice President William Elder said in an emailed statement to Bisnow.

The company had already spent $14M renovating the Standard Motors Building at 37-18 Northern Blvd. in 2015, and last year Standard Motor Products renewed its 75K SF lease in the building for 10 years, per Commercial Observer.

Meanwhile, Savanna’s 673K SF Falchi Building at 31-00 47th Ave. still has at least 200K SF to fill, according to VTS Marketplace. At 4711 Austell Place, most of the 170K SF of rentable space appears is still available, per VTS.

Sani said a lot of developers my have paid too much and be highly levered. He expects there will be more instances of owners reaching an agreement with their lenders, as was the case with Related and BentallGreenOak.

"They have no choice but to either renegotiate their mortgages — which banks right now are not doing — or give back the keys,” he said, speaking generally.

JetBlue’s decision to lease back Brause Realty’s Brewster Building at 27-01 Queens Plaza North between 27th and 28th streets kicked off a wave of interest back in 2012, said Kostas Alafoyiannis, a commercial broker at Greiner-Maltz.

"The initial thought was, I guess, was 'OK, we're going to convert these buildings, and we're going to attract large tenants,'" he said. "I guess people saw that deal … and they thought they could do the same thing."

The Relocation and Employment Assistance Program provides business income tax credits to companies that relocate to the outer boroughs or north of 96th Street in Manhattan. JetBlue got $30M in tax breaks to move to LIC, rather than relocate to Orlando, Florida, The New York Times reported in 2010.

But the main lag on the market, Alafoyiannis said, is simply the aftereffects of the pandemic, which changed the calculus for leasing dynamics across the city.

“I think what's driving the market is still the large vacancy in Manhattan,” he said. “If you can stay in the city for the same rent as you can come to Long Island City for, chances are you're staying.”

Average asking rent in Manhattan is still far more expensive than Long Island City, with average prices at $74.93 per SF in Manhattan, according to Colliers versus $46.04 per SF in LIC, per C&W. 

But sublease space is often marketed at a significant discount, and there was 23.6M SF of available sublease space in Manhattan at the end of 2022, an all-time record, according to Avison Young.

LIC Partnership’s Rothrock said the area may have taken a blow from the pandemic, but it has a better exit strategy than other parts of the city.

"There are definitely concerns about the office market in Long Island City," she said. "But we are able to attract more of the creative, innovative type of industries that you wouldn't necessarily see in your more typical office market."

She pointed to Sotheby’s $82M purchase of 25-11 49th Ave. as an auction prep room and another landlord she knows who has put a tile manufacturing showroom in their office building.

“There are owners that have been able to come up with some creative solutions in order to lease the space that was more traditionally thought of as office,” she said. “There is difficulty attracting the Class-A office users, which is tough, but that's really more of a citywide problem.“

Barone Management principal John Silviano said his company's industrial and flex office building, the Woodworks at 9-03 44th Road in Hunters Point, was designed to secure a specific kind of tenant. The building is 83% full, he said, and most of the office tenants have rented industrial space on the ground floor and taken office space on the floors above.

"We always wanted smaller-profile size tenants, unlike some of our nearest competitors in the area," he said. "As far as quality of office, they're looking to either rent the whole building to one tenant or large, large spaces, we're trying to cater to smaller needs."

He said there was a real slowdown in leasing when interest rates began rising – but there are still tours every week, and he expects the building to be full by the end of the year.

"I think the reason that some of these other buildings have failed, if you will, is not because of the office market in general or Long Island City in general," Silviano said. "I think it's more of a state of where people's thoughts are on the economy."

Sani's family has owned the Skillman Avenue building, which long was a factory, since 1984. It has low debt, he said, so First Pioneer can pitch the building at a discount — rents are now at $29 per SF, compared to the area's Class-B average asking rent of $44.33 per SF, per C&W's figures.

"My father always said … 'Don't worry, Suresh, the economy always gets better in America. If you lower your price in New York City, somebody will always take it,'" he said. "That's not happening anymore … there has been a structural change in the office market."