Small and midsize firms have cut into high vacancy at 280 Park Ave. Eliot Brown/The Wall Street Journal
Shrinking investment banks have caused headaches for owners of New York's office towers, as one of the city's dominant industries has shed millions of square feet of space since the downturn.
But landlords are finding that just as the financial-services sector can taketh away, it also can giveth.
While the big banks have reduced their size because of new financial regulations and shareholder pressure to simplify, hedge funds, alternative-investment managers and regional banks have been expanding, helping to fill some of that void.
Midsize financial firms—those leasing between 20,000 square feet and 100,000 square feet—have added nearly 1 million square feet of space in Manhattan since January 2013, according to real-estate-services firm CBRE Group Inc. CBG +0.04% During that same time, total space stayed flat for financial firms leasing more than 100,000 square feet.
More than 70% of leases signed by midsize financial firms were for expansion, according to CBRE. Some of the expanding firms are run by former big-bank executives or are businesses that had been owned by financial-services giants.
For example, hedge fund Napier Park Global Capital LLC had been owned by Citigroup Inc.C +1.49% until the recently implemented "Volcker rule" forced the bank to spin it off. Napier in January leased 25,000 square feet in a tower at 280 Park Ave.
Downsizing by big companies appears to be "driving some of the smaller financial services that seem to be popping up every day," says Steven Durels, director of leasing forSL Green Realty Corp. SLG -0.10% , Manhattan's largest office landlord and an owner of 280 Park Ave.
To be sure, that growth is still no replacement for the major investment banks, which had long been the fuel for the country's largest office market.
The 10 largest banks in the city reduced space by 6 million square feet between 2008 and early 2012, according to a 2012 report by International Strategy & Investment Group Inc. Since then, those banks have exited—or are planning to exit—at least 2 million addition square feet. Shrinking companies include Citigroup, which is leaving its headquarters at 399 Park Ave. to consolidate in existing offices in lower Manhattan.
But that downsizing and the jettisoning of businesses such as bank-owned hedge funds or proprietary trading, as required by the Dodd-Franklaw, have given opportunity to alternative-investment managers.
Landlords particularly like financial firms as tenants because they are among the few that can afford top rents. The number of lease deals signed for at least $100 a square foot—an amount typically signed only by financial firms—reached 80 in 2013, up from 51 in 2012, though still shy of the peak 91 signed in 2008, according to Jones Lang LaSalle.
Deals in the past year in Midtown include an Angelo Gordon & Co. expansion to more than 100,000 square feet in 245 Park Ave., nearly double the amount of space it leased in 2012. The Brookfield Office Properties Inc. building used to be largely occupied by J.P. Morgan Chase & Co., which has been downsizing.
Demand from small and midsize firms has been good news for the owner of 280 Park Ave., a venture of SL Green and Vornado Realty Trust. The 43-story Midtown Manhattan tower, which the venture purchased in 2011, has struggled with high vacancy as tenants including Deutsche Bank AG moved out. It was 43% vacant in 2012, according to research firm Trepp LLC.
But within the past year, the venture and its leasing agent, CBRE, signed five leases—all with small or midsize financial firms that were expanding significantly or spun off by a bank.
Besides Napier, they included Promontory Financial Group, a financial-services regulatory consultant. Another, BlueMountain Capital Management LLC, signed a 50,000-square-foot lease that doubles its space within the building.
Peter Turchin, an executive vice president at CBRE who has been involved with leasing at the building for about 15 years, said he has "seen more growth in the last year than I have in any previous year" at 280 Park.
Similar growth may not make much of a dent in the national office market. Alternative-investment managers are heavily concentrated in New York, and less likely to make up a significant part of the market in many other cities, real-estate experts say.
One exception: Greenwich, Conn., the hedge-fund haven where rents are back near peak levels. Rents sought by landlords in Greenwich reached $59.64 a square foot at the end of 2013, according to real-estate data provider CoStar Group Inc., and the town is on pace to soon pass the peak of $61.01 reached in mid-2008.
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