(Bloomberg) -- A part of Manhattan long known for its car dealers and warehouses, and more recently trendy restaurants, is on the verge of also becoming an upscale office market with the arrival of Bill Ackman.
The hedge-fund manager next year will move his firm, Pershing Square Capital Management, from the 42nd floor of a Plaza District tower overlooking Central Park to an auto-dealership building on 11th Avenue in Hell’s Kitchen, three blocks from Larry Flynt’s Hustler Club. The neighborhood has had to overcome a lingering image from its days of gangs, prostitutes and drug dealers.
The area, from West 42nd to West 59th streets, and Eighth Avenue to the Hudson River, “is still quite early in its evolution,” said Joseph Sollazzo, a real estate economist at CoStar Group Inc. “Boutique-office construction is picking up, and the lofty rents such properties have been able to achieve bode well for this neighborhood.”
Hell’s Kitchen -- north of the skyscrapers rising at the Hudson Yards site to the south -- is emerging as a viable office market, with high-profile companies looking at industrial hulks that not long ago were written off by respectable New Yorkers. It’s part of the trend that has given tenants alternatives to traditional office towers, in once-sketchy neighborhoods such as West Chelsea and the Meatpacking District.
While Hell’s Kitchen has relatively little dedicated office space -- just 8.1 million square feet (753,000 square meters) of the more than 400 million square feet throughout Manhattan, according to CoStar -- what’s there is in high demand. The area’s vacancy rate hovers around 2.5 percent, compared with about 7.5 percent for the entire borough. Asking rents in Hell’s Kitchen have jumped about 43 percent in three years, to around $55 a square foot, about $4.40 more than in lower Manhattan.
In the Meatpacking District, top rents now exceed $100 a square foot, a price once seen only in Midtown’s Plaza District, the neighborhood Ackman’s leaving. Demand has also pushed up rents in other areas once considered off-limits to traditional firms, including the Flatiron District, the East Village and Soho.
Hell’s Kitchen has come a long way since the 1970s, when its streets were prowled by Mickey Featherstone and James Coonan’s Irish mobsters, the Westies. Now bars and restaurants happily employ the neighborhood in their names, and stores sell Hell’s Kitchen T-shirts.
“When I first started in 1999, we were using a very sterile moniker -- Midtown West, or Clinton,” said Christoffer Brodhead, a director of sales and acquisitions at Cushman & Wakefield who specializes in the area. “We shied away from the Hell’s Kitchen branding. Hell’s Kitchen is now cool. Much of the grittiness -- or all of it, almost -- has subsided, but people find the Hell’s Kitchen name has a certain credibility and New York-ness authenticity that’s of interest.”
The neighborhood’s transformation started with apartments, as the promise of cheaper rents caused tenants to look past its dubious heritage and lack of subway service.
More than 9,100 residential units have been built in Hell’s Kitchen since 2001, according to data from the listings website StreetEasy. About two-thirds are rentals, and the rest condominiums. Among the neighborhood’s notable new luxury projects are Moinian Group’s Sky, Manhattan’s largest single multifamily building, and the Durst Organization’s Via 57 West, designed by Danish architect Bjarke Ingels. Hell’s Kitchen apartment rents climbed to a monthly median of $3,200 in May, close to the Manhattan-wide $3,250 median, according to StreetEasy.
At 787 11th Ave., Pershing Square is taking about 50,000 square feet on two new floors, to be built atop of the current eight, according to a person with knowledge of the plans. There also will be a gym, outdoor terraces, space for the Pershing Square Foundation and a tennis court on the roof for use by all office tenants. The hedge-fund firm will pay about $88 a square foot, down from the $140 a square foot it’s paying currently, said the person, who asked not to be identified because the agreement is private.
A partnership including Ackman bought the 464,000-square-foot building a year ago for $255.5 million from Ford Motor Co. Adam Flatto, president and chief executive officer of developer Georgetown Co., which leads the partnership, called the project a “counterpoint” to the skyscrapers being built to the south.
“The Hudson Yards product is world class and it is fantastic for New York City,” Flatto said. “The product that we have at 787 is somewhat different, in that it is not a massive building of glass and steel, but because it’s a conversion of an older industrial property, has certain legacy and architectural integrity that a not insignificant number of tenants really prefer.”
The bottom floors of the building, developed in 1929, will be used as auto dealerships, keeping with its heritage as the home of Packard Motor Car Co. On floors six, seven and eight, 160,000 square feet of offices are being marketed by CBRE Group Inc. Rafael Vinoly, designer of the Billionaires’ Row condo tower 432 Park Ave., is the architect.
The Pershing Square plan isn’t without precedent. At 636 11th Ave., the onetime Auerbach chocolate factory, built in 1913, became the home of advertising firm Ogilvy & Mather’s New York office in 2009. In late 2012, Taconic Investment Partners paid $112 million for a former film-editing house known as the Movielab Building. Its tenants today include MicroEdge LLC and the New York Stem Cell Foundation.
The Westies haven’t quite gone away. While the gang long ago lost its deadly edge, several old members still live up and down Ninth Avenue, and can be seen frequenting local stores, said James Famularo, a senior director and retail leasing broker for Eastern Consolidated.
“They just add to the cachet,” he said. “They help give Hell’s Kitchen a different personality. To me, it just adds to the allure of being there. It’s a slice of New York history.”
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