Matching Space To Needs of Firms- Many Growing Tech Firms Want Office Space in Older Buildings

When Facebook FB +1.34% searched for new office space earlier this year, it had its pick of shiny office towers from 57th Street to the Financial District, but instead it chose a building once home to the Wanamaker's department store in NoHo.


The social media giant is one of hundreds of technology and creative firms in the city that are growing rapidly. But many want older space and aren't interested in the types of building New York has typically offered up: glass towers with prestigious avenue addresses and rents that can climb above $100 a square foot.

Those preferences are now influencing the debate over what kind of office space development New York should encourage as Mayor-elect Bill de Blasio prepares to take office.

Last week, the office space debate heated up after Mayor Michael Bloomberg withdrew his plan to rezone the area around Grand Central Terminal to allow for new, larger office buildings. Supporters of the plan—which had failed to win City Council support—said the space was needed to ensure the city's business sector is able to grow, add jobs and stay competitive with cities like London and Singapore.

But some policy experts, developers and businesses are also pushing Mr. de Blasio to focus on creating more affordable office space to reflect a shift in the city's economy away from large banks and law firms to more small and midsize firms in technology and creative industries.

"That really is going to be one of the major challenges for the de Blasio administration," says Seth Pinsky, former president of the Economic Development Corp., who now works for RXR Realty, a major developer. The solution "partially lies in the traditional existing business centers, but it can't entirely be accommodated in those areas."

Mr. de Blasio last week pledged to revisit Mr. Bloomberg's proposal to rezone the area around Grand Central after he takes office. "For the sake of New York City's long-term economic vitality, Midtown East should be rezoned to allow the creation of a world-class 21st-century commercial district. But it needs to be done right."

When asked about space more suited for tech firms, a spokesman for Mr. de Blasio last week pointed to a technology policy paper his office released in August. It stated that he supports rezonings that allow for more live-work space and modern office space. The spokesman declined to comment further.

The city has numerous tools for encouraging development and job growth, including tax breaks, zoning and even subsidies. These tools have been used over the decades to prevent big employers from fleeing the city and to rebuild areas like Times Square.

Experts say the city will continue to need new office space in the long term. The city's Independent Budget Office reported in September that New York will need about 52 million square feet of new office space by 2040.

But proponents of space for technology companies argue that the city shouldn't lose sight of more immediate space needs resulting in changes in the city's economy since the downturn. The financial-services industry, long an engine of the city's economy, has been contracting and hasn't been filling the modern skyscrapers and new developments as it did before the bust.

Meanwhile, the city's growth has been coming largely from media, technology and other so-called creative businesses. The state Labor Department reported that the computer-systems design and advertising sectors reached highs in August while the financial-activities sector "was weaker than expected."

In the last five years, information-technology jobs in the city have increased by 29% to 52,900, according to the Center for an Urban Future. This has caused rents to soar in some areas like Midtown South, while rents in more traditional business neighborhoods have recovered more slowly from the downturn.

That presents challenges to companies in the city, such as Squarespace, whose product helps people build websites. The SoHo-based company has been looking for new office space for nine months, but the options so far have been unaffordable, with rents that easily climb above $65 a square foot.

"Frankly it's just really, really, really expensive," says Anthony Casalena, founder and chief executive of the company, which hopes to double its workforce to about 400 employees next year.

The Bloomberg administration has rezoned prime areas like Williamsburg and Long Island City, which have seen a boom in residential development. But the need for vibrant live-work communities was less of a focus, in part because the demand for office space outside central business districts wasn't yet clear.

"With the Greenpoint-Williamsburg rezoning, nobody had the slightest inclination that there would be a demand for office space on the Brooklyn waterfront," says David Lombino, a former Economic Development Corp. official who's now with Two Trees Management Co. "It turns out that there is and currently there's not enough space to meet the demand."

Priorities of developers and the city have started to shift in recent months, and hundreds of thousands of square feet of new funky, low-price office space is planned, mostly in Brooklyn.

But some policy experts said the city should incorporate a requirement for some lower-priced office space into large rezonings, in much the same way as it encourages or requires affordable housing. This won't be easy, they acknowledge, because office space is likely to be a tougher sell to community groups than housing.

"Elected officials are eager to see this type of development in their districts," Mr. Lombino says. "The question is what they would be willing to sacrifice to get it."