Hedge funds pull Manhattan rents to $200/sq ft

By Ilaina Jonas

NEW YORK, July 9 (Reuters) - In New York, hedge funds are the office landlord's best friend.

While hedge funds are not numerous compared with the overall Manhattan tenancy, their influence on rental rates has been breathtaking, several brokers said.

"They are the drivers of where market rents are going," Alex Chudnoff, Cushman & Wakefield executive director, said.

What they lack in population, they make up for in buying power. Many hedge funds are not only able to pay top dollar for their offices, but they need to do so to impress and retain both clients and staff. Like a magnet, hedge fund rents have pulled up other rents across the market.

"They've brought everything up because they've raised the top level, and now the B space is priced as A space, and the C space is now priced at B space," said Ben Friedland, CB Richard Ellis Group senior vice president.

Despite Greenwich, Connecticut's fame as a hedge fund haven, many firms, such as The Tudor Group, have offices in both locations. Hedge fund industry research firm HedgeFund.net estimates there are about 1,250 hedge funds in Manhattan.

"Greenwich will never top New York City unless the principal lives there," Chudnoff said.

In the first quarter of 2007, the average asking rent for top quality Midtown office space rose 27 percent to $62.89 per square foot from a year earlier. Rents surpassing $100 per square foot -- shocking just a year ago -- were too numerous to count.

Cushman & Wakefield is scheduled to release its second-quarter Manhattan market statistics on Tuesday. Sheldon Solow, owner of one of the most prestigious buildings in Manhattan, is already asking $200 per square foot for the top floor of 9 West 57th St.

"It's truly special space," said Christopher Kraus, principal at Staubach, describing the view of Central Park above the 26th floor.

Cushman & Wakefield's Chudnoff refers to Solow's building and five others located near Central Park -- 590 Madison Ave., the General Motors Building at 767 Fifth Ave., Park Avenue Tower at 65 East 55th St., Lever House at 390 Park Ave., and Vornado Realty Trust's (VNO.N) 888 7th Avenue -- as the "hedge fund hotels." Each counts at least six funds as tenants.

"The hedge funds in those buildings are the guys who have at least $2 billion under management," Chudnoff said.

ART AND SPACE

Over the past five or six years, not only have their numbers increased, but some hedge fund firms have grown and their space needs have increased, with some surpassing 100,000 square feet.

The search is taking them to areas once unheard of: Third Avenue, lower Madison Avenue, Park Avenue South, the Financial District and Avenue of the Americas, where asking rents for 1 Bryant Park reach $185 per square foot.

"There used to be areas where they would never go," Chudnoff said. "Now, they'll go anywhere."

The typical hedge fund needs about 10,000 to 20,000 square feet of space. Cosmetically, the firms demand views, usually of Central Park. Many spend between $250 to $450 per square foot for marble floors, gyms, kitchens and private bathrooms.

"It's a competitive environment for talent, so part of the allure for different funds is to have a nice working environment and amenities within the space to keep the people working," Friedland said. "There's lots of glass, lots of marble, lots of wood. A lot of people's personal art collections are displayed within the space."

More important are the not-so-sexy needs: wide-open trading floors, back-up electricity systems and high-powered heating, ventilation and air conditioning to keep traders comfortable and computers running, real estate brokers said.

Based on the typical hedge fund fee structure, yearly rent for a hedge fund with $3 billion of assets equates to about 5 percent of its revenue, in line with rent allocations of other service firms, Kraus said.

Real estate mogul Sam Zell has warned that a hiccup in the hedge fund industry could be a body blow to the Manhattan office market.

However, Sam Chandan, chief economist for real estate research firm Reis Inc., said the overwhelming demand for Class A Manhattan office space and a dearth of supply would prevent the overall market from crumbling.

"It would have to be a little bit more than a hiccup," he said. (See www.reutersrealestate.com for the new global service for real estate professionals from Reuters)