Non-profits on the run

Real Estate Weekly,  Oct 17, 2007  by Jason Turcotte

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Five years ago--after 9/11--nonprofits flocked to downtown, leaving behind mad midtown rents. But downtown is desirable once again and now tax-exempt organizations are scrambling to renew Manhattan leases while their tightened purse strings are pushing them elsewhere.

"To me, we're at the cusp of a trend, assuming the market holds," said Suzanne Sunshine, vice president of CBRE's Nonprofit Practice Group. "This is the beginning of a trend where [nonprofit] headquarters will be going to the outer boroughs."

This past summer showed signs of movement for nonprofits. Edwin Gould Services for Children and Families relocated from downtown to the Bronx, where they now pay $19 psf at their 412 East 147th Street location. The organization left its space at 40 Rector, along with its $45 psf asking rental price.

Sunshine says "28" seems to be the "magic number" nonprofits aim for. She recently showed a nonprofit space at 90 Broadway, where asking rents were around $45 psf. But that price won't cut it, especially for social services organizations, which need to devote the bulk of their budget to programs, not real estate. "Most nonprofits have to be very cost conscious," she said.

Touro College, New York Foundling Hospital and the Correctional Association of New York (which also relocated from midtown), recently snagged space at 2090 Adam Clayton Powell Jr. Blvd., in Harlem for approximately $28 psf. The same asking rents were negotiated at the converted Macy's warehouse at 177 Livingston Street, in downtown Brooklyn. These sites offered unique opportunities because both landlords agreed to do the build-out and offer architectural services. But securing space at these rents is becoming mission impossible.

"It's not like it's been a mass exodus," said Robert Tunis, senior executive managing director at GVA Williams. "And it's too early to call it a trend, but it's very noteworthy."

Tunis, who represents several New York nonprofits, said the staggered leases will prevent organizations from packing up simultaneously; some post 9/11 downtown leases have five plus years remaining.

But he also says the challenges nonprofits face will only be exacerbated by today's credit crunch. Landlords are leasing to tenants who are the most funded and best credited. Many of these organizations cannot afford Harlem, let alone midtown or downtown. Tunis says that once rents hit $40 psf, these groups can no longer justify shelling out the money and they may have to step off the beaten path.

"This is the first time in my career that this is happening," Tunis said. "Nonprofits have always fled to the pioneering areas."

It's undoubtedly an uncertain real estate era for New York's nonprofits.

"It's been a very complicated situation that hasn't fully played out," Sunshine said. "It's a very difficult time. My feeling is that New York City needs a new nonprofit zone or building."

To date, New York has just one "association center," an office building that encourages nonprofit tenants through real estate tax advantages. Larry Silverstein's 120 Wall Street serves as a paragon for such special zoning or building designation. The site has 20 of its 34 floors leased to nonprofit organizations. But there are few perks for property owners wishing to rent to nonprofits. The City's Industrial and Commercial Incentive Program (ICIP) does, however, provide real estate property tax relief (for up to 25 years) to landlords who make capital improvements to their property. This could be applicable to landlords looking to convert warehouse space into commercial lofts.

Sunshine isn't alone in wanting the City to step up by offering more nonprofit incentives to landlords and developers.

Eugene Giscombe, president of Giscombe Realty Group, is working with neighborhood groups to encourage City officials to designate the 125th Street area an arts/cultural district, in conjunction with the neighborhood's rezoning.

Speaking at B'nai B'rith's October luncheon, Giscombe said he's proposing a 1:4 density bonus, meaning the City would grant developers/landlords an extra four square feet of space for each square foot it reserved for nonprofit tenants.

"For most of these organizations, their biggest challenge is to meet market rates," Giscombe said.

As a result, nonprofits are leaving Manhattan. The goal of the new district is to prevent them from relocating to the outskirts of New York because Giscombe says the success of nonprofits rely on their ability to stay within efficient mass transit.

He says Harlem has that convenience to transportation, and that such a district would make 125th Street "a new frontier to develop."

And at the rate Manhattan rents are climbing, organizations may need more nonprofit-friendly districts or buildings to ensure a future here in New York.

According to the CBRE's Nonprofit Report, midtown Manhattan rents rose to $81 psf, an increase of more than $20 psf from last year. And the vacancy rate is down from 6.3% last year to 4.4% this year. In comparison, Brooklyn remains a bargain.