Small businesses squeezed as Class B office space dwindles

Maggie Cassidy, director of sales for Venaca, a six-year-old Chelsea software company, in the company’s Avid video-editing suite

By Chris Lombardi

Maggie Cassidy, sales director at Venaca, a six-year-old software company specializing in digital assets management, speaks laughingly of her company’s former offices at 30 West 21st St. “It used to be a nightclub, so it wasn’t fit for people, it wasn’t fit for business,” she said of the building whose only other tenants were a social services agency and hundreds of non-paying mice. “But it was an interesting space, and it was ours. We probably would have stayed there if we could.”

But the 10-story building was sold in the spring of 2006, and is slated for demolition to make way for a condominium complex.

Even with three months’ notice before they had to get out, Cassidy and company president George Grippo knew that finding a new space would be challenging. They didn’t think it would take seven months and $50,000, including six months subletting furnished offices in the West Village before returning to Chelsea this past February. The problem was not so much the rent, Grippo told Chelsea Now last month, but the fact that the kind of office space they wanted, called Class B, was in such short supply.

“Class B? It doesn’t exist,” said Grippo.

Venaca is only one of a plethora of companies, individuals and organizations feeling the squeeze from the current real estate market. According to real estate agents and experts, scores of century-old buildings that have long provided smaller Class B space in Chelsea and the Flatiron and Ladies’ Mile Districts have been either demolished or converted to luxury condos or high-end, floor-through Class A office space. Meanwhile, skyrocketing Class A rents, at around $70 a square foot, have sent some mid-size companies into cheaper Class B offices, shrinking that market and further escalating prices for small-business owners.

As a result, many long-established businesses and organizations in those districts are now quaking as their 10-year leases expire, and new small business owners are increasingly working from their homes or renting small portions of “shared spaces” run by large developers like Vornado. Even if they do find Class B space, as Venaca did after a nine-month search, small businesses and nonprofit organizations can incur substantial costs in the process. All of these factors create greater pressure on the Garment District zoning debate. Yet, as noted by C.B. 5 and nonprofit groups, there’s no organized advocacy for small businesses as these debates proceed.

A Dying Breed

“These [Class B] are the spaces for people in creative fields,” said architect Nancy Goshow, co-chair of C.B. 5’s Land Use and Zoning Committee. “Architects, designers, ad agencies, nonprofits—everyone who doesn’t want to go into a stuffy office space in a corporate cubicle.”

Class B spaces also cost quite a bit less than Class A spaces, with their security systems and floor-through offices. But that distinction, like many in the New York Market, has been upended by the 21st century real estate landscape in Manhattan, where buildings are bought as investments by property owners looking for stratospheric returns.

“The buildings have so much character,” added Goshow. “And because they have so much character, they make fabulous residential lofts.” People want to live in the middle of things, she added, and what she calls “lower midtown” has the perfect mix of light manufacturing, the arts and entertainment to be enticing to condo buyers, and thus to make conversion of buildings from office to residential use—or even tearing them down and building a glitzy new condo towers—not just cost-effective but quite profitable. As a result, according to a July 2006 report from the real estate firm Cushman and Wakefield, the amount of Class B space in Manhattan decreased by more than 900,000 square feet in just one year, from 2005 to 2006.

The price of all Manhattan office space hit the headlines again in March 2007 after a report from international realtor Colliers ABR headlined “The Quest for Less Expensive Space in a Rising Market.” The company’s most recent figures show Class A rents averaging $74 a square foot, with a vacancy rate of 5.5 percent, the lowest since 2001, and Class B space at average of $46. Even for small businesses who are able to pay these rates, it is often hard to find building owners interested in Class B tenants.

“There’s a supply and demand problem, especially in Chelsea,” said David Lebenstein, an executive at Colliers ABR. “There isn’t much [Class B space]. And what exists, it’s therefore at a premium kind of rent.” In addition, he said, “Class B is getting upgraded…and when they upgrade the elevator and the lobby, all those amenities, the rent goes up.”

Lebenstein, manager of the Colliers ABR’s division for nonprofit agencies, has seen the lower Manhattan market change up close. In the early 1990s, he said, he would receive calls from building owners, asking if he could match their spaces to stable, appropriate small businesses and nonprofit groups. “Now, they have so many more options,” he said. “They have retailers, they have residential. Now even the lower floors are residential.”

Chelsea & G.D. Hard Hit

C.B. 5 sees itself as ground zero of these changes, with more than 74 buildings converted to residences since 2000, including 23 landmarked structures, and 15 new residential towers built or planned, according to a February 2007 report commissioned by the board. The C.B. 5 report, which includes a photographic map showing the historic landmark buildings of the Ladies Mile District, explores multiple concerns, from school construction to traffic. But the shift away from commercial space for small business and nonprofits cuts deep with many of the area’s board members and local organizations.

“People are kind of in sticker shock,” said Marcia Brown, director of programs for the Nonprofit Coordinating Committee at 1350 Broadway, which offers technical assistance to more than 300 organizations citywide. “In general, I get calls from people because their lease is up, or about to be.” In Chelsea and the Garment District, she said, many groups are getting to the end of their 10-year leases and aren’t sure they can stay in the area. “Theater companies, dance companies are having an especially hard time.”

The situation is even starker for social service agencies. “So many of our clients are service providers; they need to be near a transit hub, since they serve low-income clients dependent on public transportation,” said Brown. Lebenstein confirms the same trend, adding that agencies “whose clients may not be attractive to landlords, such as mental health services and feeding programs,” are having an especially hard time.

Being an unattractive client was not an issue for Venaca, but space for data servers was, according to Cassidy. So was bandwidth, she said, since Venaca replicates the video archives of their clients—which include Lifetime, CNN and MTV—in order to help them maintain their media libraries and stream them on the Internet. When Venaca left West 21st Street at the end of the three months, at a relatively minimal cost of $7,500, that move was only to temporary quarters in the East Village. Meanwhile they kept looking, back in Chelsea.

“We had a broker show us one of those former factories,” said Grippo, describing a building west of Eighth Avenue, in an area opened to non-apparel businesses by the 2005 West Chelsea rezoning. “Raw spaces. They took out the cutting tables, and there we were—it’s up to you to [renovate] it.”

Taking it Personally

As a small-business owner whose office is just north of Venaca’s old building, C.B. 5 member Nancy Goshow takes recent trends quite personally. “I live in Chelsea, I work in C.B. 5, I’ve been walking up Sixth Avenue for at least 20 years and seen it change,” said Goshow, whose firm, Goshow Associates, has been at 36 West 25 Street for more than 10 years.

“From what I’ve seen, and also from what we’re seeing on the board, I see more Class B office space going to high-end residential,” said Goshow. “That, in turn, is forcing [Class B] offices to seek office space in the garment district,” especially in the avenues unprotected by the current Special Garment District zoning, which can displace some small fashion-related businesses and factories.

In recent C.B. 5 committee meetings where proposed zoning changes in the Garment District were discussed, Goshow noticed that garment-industry business people have an organized voice, via groups like the Garment Industry Development Corporation. She expressed amazement that no similar organized entity seems to exist for small-business owners impacted by city policies. “I’m a member of the Architectural Institute, the Women’s Small Business Association. Where is the voice in this fight, for small business owners as a group?”

Efforts by Chelsea Now to locate such an agency, one that would speak to trends for small business, were similarly fruitless. The city’s Small Business Services Department (SBS) work directly with the Business Improvement Districts (BIDs) in each neighborhood, but don’t compile data on the real estate challenges faced by new businesses. A representative of the SBS central office on William Street, near City Hall, who declined to give his name, did say that matters were particularly difficult for start-up businesses. “Many people work at home,” he said, “or in those new ‘shared offices’ run by another company.”

As Venaca’s three-months’ notice ran out, the company found itself in just such a space, at 770 Broadway near Astor Place. They were renting from Power Space, a division of the Fortune 500 international retail and office giant Vornado, which offers “executive office suites” on Madison and Park Avenues, and Third Avenue, at premium rates. Small companies take such spaces to avoid set-up costs, also saving on utilities from electricity to bandwidth, but for Venaca it was never anything but a temporary situation. The overall cost of Venaca’s five months in those offices was between $20,000 and $30,000. When they heard about a new Chelsea space, in the other half of a floor already occupied by another technology company, Media Matters, the decision to move was made quickly.

That final move, to 450 West 31st Street, was the most costly of the three, according to executive vice president Andrew Samaan. He told Chelsea Now that the total cost of the move was about $20,000, between retrofits, “Spartan decoration,” server installations and purchase of new equipment, including a satellite pointed at the Empire State Building to transmit video regardless of bandwidth.

Chelsea Now asked about where all this was going. Many said they saw much of the same. Lebenstein, of Colliers ABR, said the trend is toward a far more expensive Manhattan, in all sectors. “In an international context, New York is world-class city, but its real estate values have traditionally been low, when compared with other such cities, like London or Tokyo or Paris.” What’s happening now, he said, is a re-valuation more consistent with New York’s status.

As for the nonprofits Lebenstein spends his time helping, he counsels them on how to seize a rental or purchase opportunity before it goes away, and often suggests that they move out of the borough if possible. “Why spend $40 a square foot when you can get a bigger space in Long Island City for $20?” he said.

But being chased out of the neighborhood, and perhaps Manhattan or worse, the city, is for Chelsea’s small businesses and nonprofits something akin to their worst nightmare.

“What does that do to the texture of the neighborhood?” asked Goshow. “We will have a place where people can no longer walk to work, which is part of the reason to live here.”

Maggie Cassidy certainly agrees. “I live on the East Side. I like that I can still walk to work,” she said. Given that Veneca’s 31st Street building sits at the mouth of the Lincoln Tunnel, she knows how close they came to being in New Jersey—a fate that has beset so many other companies that could not find affordable space

“I’m glad we stayed in the city,” Cassidy told Chelsea Now. “So many tech companies are moving to Weehawken, or Connecticut. Which is fine for them, but it’s kind of a shame.”