By Jonathan Vatner
As published May 4, 2011 in the Square Feet section
Prebuilt office space — in which the landlord builds out the office before leasing it — has traditionally been seen as inferior to the custom-built variety.
“It used to be when a landlord couldn’t lease the little pockets of leftover space, they’d do a prebuild to try and move them,” said Joseph Brancato, a managing principal at Gensler, an architecture firm that often does prebuilt design work. “You’d put down a basic carpet and drywall and paint the walls, and the upgrade would be a wood door.”
These days, however, prebuilds are becoming far more sophisticated. They are a crucial part of a building’s sales strategy, and the quality is often good enough to attract high-end firms in finance, law, communications and consulting, among many other fields. Small companies that have neither the time, the inclination or the cash to go through the construction process can sign a lease and move right in.
“The start-ups don’t want to wait around for space,” said William C. Rudin, the vice chairman and chief executive of the Rudin Management Company, which has gut-renovated and prebuilt 120,000 square feet of space in the last year. “They’ve got the money and want to get started on their business plan.”
Other New York landlords have jumped into the prebuild game to a similar degree. The Cohen Brothers Realty Corporation has prebuilt 100,000 square feet in the last five years and is working on an additional 50,000 square feet. RFR Realty recently prebuilt the entire second floor of 17 State Street and is planning two more prebuilt offices in the building. SL Green Realty Corporation creates at least 100,000 square feet of prebuilds a year. And RXR Realty, which owns two buildings in Manhattan, is prebuilding almost half the empty space at 340 Madison Avenue and about 15 to 20 percent at 1330 Avenue of the Americas.
Though prebuilt design is not aiming for the avant-garde, the offices are looking sharper and more luxurious than ever. Reception areas are full of glass, wood, granite and marble, and the pantries even in small offices are often set up with stainless-steel appliances, specialty finishes and coffee bars. Ceiling heights are raised when possible, and window treatments are getting softer and more minimal.
“Landlords are much more attentive to good, unique design versus the typical prebuilds of five to 10 years ago,” said Scott Spector, an architect and a principal of Spector Group, which has worked with many companies on prebuilds. These offices, he added, “have been fully engineered to the hilt.”
Some prebuilds are focusing on sustainability, too. The Rudin Management Company, for example, uses recycled drywall, ceiling tiles and carpeting; bamboo cabinets; and PaperStone countertops, which are made of recycled paper. Also, the company monitors energy consumption and air quality, and more than 60 percent of office waste is recycled.
These upscale prebuilds do not come cheap. Mr. Spector estimates that the ones he designs cost landlords $60 to $85 a square foot. At 1330 Avenue of the Americas, where RXR is courting high-end financial firms and hedge funds, the price runs as high as $120 a square foot.
For tenants looking to build out their own space, Mr. Spector estimated that it might cost them 10 to 20 percent more than what a landlord would pay a square foot.
Real estate companies see these as good investments, however. “The rationale is not only are you able to lease the space quicker, but that space is reusable for multiple generations of tenants,” said Steve Durels, the director of leasing for SL Green. “You’ll be able to re-rent it, typically with minor cosmetic work.”
As for price comparisons for raw space, SL Green, for example, adds 10 to 15 percent to its lease prices for prebuilt space.
Also, in a tough office market, spending the extra money helps a company’s prebuilds stand out.
“I enjoy walking tenants through our prebuilds,” said William S. Elder, an executive vice president and the managing director of the New York City office of RXR Realty. “You get off the elevator and see perfectly lit lobbies, marble floors — beautiful environments. It’s a ‘wow’ factor.”
Prebuilds bring in more income than raw space does, too. In most cases landlords can charge a premium for the space, and they do not have to offer free rent during the construction phase, a standard industry practice.
“You may spend a bit more on the capital side, building these things out to make them look right,” said Mr. Elder of RXR, “but you make it back exponentially on the rent and the quicker lease.”
Because landlords are understanding better just how each type of tenant wants their space, prebuilds are becoming larger than ever. In years past 5,000 square feet was a rough upper limit for prebuild size. Now RXR has an 11,000-square-foot prebuild at 340 Madison, and SL Green routinely prebuilds spaces up to 10,000 square feet.
Designing for an imagined tenant can be an art, and the larger the space, the harder it is to do. To some extent landlords will adjust a prebuilt space if it is not quite right for a tenant. Mr. Rudin said the design could be adjusted if a committed tenant caught them before construction was to start.
“We’re not going to get it 100 percent right all the time,” he said.
Anticipating tenants’ needs becomes less of an issue with building to suit, a less common version of prebuilding in which the landlord builds out a space based on a committed tenant’s needs. These offices run larger than traditional prebuilds; for example, last year, RFR Realty finished a build-to-suit project that was 18,000 square feet.
The Kaufman Organization has completed a number of these projects. The tenant meets with Kaufman’s architect and gets a custom-designed space without having to hire an architect, and Kaufman can build out the space much faster than an outside firm could.
Last October, Marr International Group, a newly formed distributor of designer eyewear, signed a seven-year lease on a 3,223-square-foot showroom and office space at 1407 Broadway from the Kaufman Organization, taking advantage of the build-to-suit option.
Michelle Tiganila, the president of Marr, received special features — a kitchenette with running water and bamboo flooring — for a reasonable charge, and the space was done within about two months, wrapping up a few weeks before Accessories Market Week in January, a big industry event.
“They were very flexible in the way I wanted the space to work,” Ms. Tiganila said. “That’s why we’re here.”