Marty Burger, CEO of Silverstein Properties, discusses the evolution of the office market
The existing U.S. office building stock is aging and becoming obsolete, especially relative to other major international cities
The effective amount of available office space in New York is declining due to obsolescence and conversions to hotels and condominiums
Replacement office buildings must address modern tenant needs, with higher employee densities, "high tech" buildings, and more open floor plans
In a recent interview, Marty Burger, CEO of Silverstein Properties, addressed the future of office space. In New York as well as throughout the country, the existing office building stock is aging and becoming obsolete, especially relative to other major international cities. According to Burger, 50 percent of office space in Hong Kong has been built in the last 20 years; in London 34 percent of the office space was constructed in the last 20 years; but in New York just 7 percent of the office space is less than two decades old. The older space is either becoming obsolete or being converted to other uses such as hotels or condominiums, shrinking the amount of available office space.
New office buildings must address modern tenant needs, Burger said. Principally, new buildings need to handle a higher density of employees. Burger estimated that in the year 2000, office buildings were leased at 300 square feet per employee; today that figure has declined to 175 square feet per employee. Higher densities of workers place greater demands on elevators, HVAC, and bathroom capacity. Users today also demand "high tech" office buildings, with efficient space layouts, backup power generation, fresh air intake, and floor-to-ceiling glass. In addition, collaborative industries are looking for open floor plans. When Silverstein Properties designed Two and Three World Trade Center, it placed large, 70,000-square-foot floor plates at the bases of the buildings anticipating trading floors for financial services firms. Instead, TAMI—technology, advertising, media, and information—tenants took the space.
Zell/Lurie: Office space, as you said, has always been a large part of your portfolio. Is the nature of office space changing? For example, we hear that space per worker is declining, tenants demand different layouts than they used to. What are you seeing happening in your properties? How important are the changes and how are you adjusting? What are the implications for landlords and what are the implications for investors? And do you expect the changes in office space to be permanent or is this just a transitory thing?
Marty Burger: Well, let's start with the fact that the average age of a New York City office building is 75 years old. And what does that mean? It means that tenants who are looking for new space, who want all the the benefits of high tech office living, whether that's backup power generation, fresh air intake, floor-to-ceiling glass—those are sort of some of the big ones. But then, you've got a major issue, which we call "densification," which you were alluding to. Let's start at the year 2000, I would say we were at 300 square feet per employee. By 2010, that number is more like 200 square feet per employee, and today, in 2015, we're probably at 175 square feet per employee. And so, you've got employers that are pushing more people into the same space. Or they're downsizing and taking less space and putting the same people into that space. Either way, this is taxing to the buildings. So we've been criticized for... why are we building new space in Manhattan? Manhattan doesn't need new office space.
Well, in order to compete in the global world, because take a company like, let's pick Arthur Anderson, they've got people in Shanghai, they've got people in London, they've got people in Hong Kong. And their New York people, when they go to visit the satellite offices, they go to see these offices and they say, "Wow, why is my colleague's space in London so much better than my space in New York?" because they're in a 1940s building that has columns every six feet and it's very inefficient space. So what we've been doing is building brand new space, column-free, floor-to-ceiling glass, where you can actually fit more people on the floor.
But the best example of this—look at the Bloomberg Building. The Bloomberg Building is probably the most densely used building in New York City. It's got 110 square feet per employee. The building was only built ten years ago. It was built in 2005, and there are lines for the elevators, there are lines for the bathrooms. The HVAC system has trouble keeping up with the population on each of the floors.
We built 7 World Trade Center [which] opened in 2006 [and we] took this density issue into account. And everything that's being done at the World Trade Center now, One, Two, Three and Four World Trade Center, everything that's being done in Hudson Yards, 425 Park, One Vanderbilt—the new breed of office buildings—all takes this density into account. So no matter where you are going in the city, if you want a new office building, office space, you can find it. But to compete with the world's other office buildings, we need to build new space in New York. What's interesting is over the last 20 years, New York has replaced 7 percent of its space with new space. So 7 percent of 400 million square feet. When you compare that to London, that number is 34 percent. When you compare it to Hong Kong, it's 50 percent. So 50 percent of the space in Hong Kong has been built over the last 20 years, where in New York it's only 7 percent.
Add to that the fact that our obsolete buildings are now being converted to residential or hotel or other usages. We have a shrinking office stock. And so, at the World Trade Center, we built 11 million square feet of new office space, but we really just replaced the old World Trade Center. But that space is sorely needed. The Hudson Yards area, which Related is doing a fantastic job on, Brookfield is doing a fantastic job on—it's getting leased and it's getting purchased because there's a need for it. It's not just the densification, but it's the ability to create brand new, high tech space. And the way these companies are using them have changed, also. So we designed Two, Three and Four World Trade Center under this new regime. But Two and Three World Trade Center had very large floor plates at the base. The bottom five or six floors in each building were 70,000-plus square-foot floor plates to take into the account the financial services firms that might want trading firms there. What's interesting is that the TAMI sector came in and sucked up those floors.
So when Three World Trade Center, which was under construction with this—a 2.5 million square-foot building, but the bottom five floors are huge trading floors—Group M, which is the division of WPP, the largest advertising agency in the world, signed a 515,000 square-foot lease with us a couple years ago and they're moving into that space and they're using all those floors for their advertising agencies. Fox and News Corp. will be leasing the base of our Two World Trade Center if we sign a lease with them—hopefully, next month.* And they are taking those large floor plates at the base for their newsrooms for their studios, for their other facilities. But it's indicative of how tenants are using space differently.
*(2016 Note: Silverstein Properties announced Fox would not move forward with the lease of Two World Trade Center. This interview was taped in 2015 prior to this announcement.)Zell/Lurie: So when you spoke about densification, you said that we were down to about 175 square feet per employee, possibly going lower. Do you think this new American world order is going to be half the space per employee that it was 15 years ago?
Marty Burger: Right, well, you don't want to get too far down because then the collaboration becomes more of an annoyance—you get too close to people and you can't be productive.
Marty Burger: And it really depends on the firm. So law firms are not going to go into a bullpen because of the nature of law firms. But guess what? Law firms don't need all that filing room space anymore and they don't need those big libraries anymore, because everything's digital. So they can get into more dense space, but they can still have their offices for their partners and the associates can have smaller work stations, but they don't have to be on top of each other like a trading floor. So I think it depends industry by industry. But it's interesting to see the TAMI industry, because it's so collaborative, how they're just taking to this new space.