Commercial Property/East 42d Street;Rebirth of West 42d Street Is Spreading Eastward

CALL it the creeping glamourization of 42d Street.

First, Bryant Park gets a face lift, and buildings between Fifth Avenue and the Avenue of the Americas start filling up. Then the long-anticipated Times Square revitalization project gets off the ground. Retailers clamor for space on once-decrepit 42d Street between Seventh and Eighth Avenues, and Douglas Durst announces plans for a 1.6 million-square-foot office building on Broadway.

Now, the glamour effect is rippling east. Brokers report that empty space on East 42d Street is leasing fast. The imminent $200 million refurbishment of Grand Central Terminal, coupled with the Grand Central Partnership's successful efforts to drive taxi hustlers, drug dealers and muggers away from the area, have helped. So has the growing scarcity of good space in glitzier buildings in the East 50's.

But many real estate people say that East 42d Street's new popularity stems as much from what's doing to the west as from changes in the immediate vicinity. They say that what had once been a deleterious identity confusion -- "Potential tenants simply did not know the difference between East and West 42d Street," said Jeffrey S. Cohen, a senior director at Cushman & Wakefield -- is now a major boon. And many guess that the days of address camouflage -- 500 Fifth Avenue and 125 Park Avenue are both, in reality, 42d Street buildings -- are over.

"Owners who used to carefully disassociate themselves from Times Square now talk glowingly about the changes there," said David A. Falk, a senior managing director of Williams Real Estate.

Frank V. Ward, chief operating officer of Hiro Real Estate, which owns the former Mobil Building at 150 East 42d Street, agrees. "What's happening on the West Side is changing everyone's perception of the whole street," he said.

East 42d Street can use all the help it can get. According to RElocate, which tracks building vacancies, about 11.8 percent of midtown space is available; in the Grand Central vicinity -- say, 40th to 48th Streets, Fifth Avenue to the East River -- nearly 15.7 percent of office space needs tenants.

East 42d Street itself is in even worse straits. There, RElocate cites a 20.7 percent availability rate. Nor is architectural panache of much help -- RElocate says that 24 percent of the landmarked Chrysler Building (405 Lexington) is available.

"The problem is, most of the 42d Street buildings are old," said James S. Meiskin, president of the Plymouth Partners brokerage. "You can put on new skins or new systems, but you can't pull the columns out or make the floorplates more efficient."

Nor can you force long-time tenants to stay. Advertising, publishing and other industries that once dominated the area have long since moved their focal points to Midtown South. The few huge corporate tenants are gone, too. Mobil, The Daily News, American Home Products, all have vacated the buildings that bore their names, leaving hundreds of thousands of empty square feet in their wake.

But now, as buildings elsewhere fill up, tenants who shrugged off the Grand Central area are being forced to look at it again.

"Grand Central is the last high quality business district with significant vacancies left," said Robert F. Works, a managing director at LaSalle Partners.

The space is moving fast. A year ago, 30 percent of 110 East 42d Street was available. Today, after a lobby and technical system overhaul, 13.5 percent of its 230,000 square feet is left, and much of that has leases out.

"We'll be down to a 4 percent vacancy soon," predicted David L. Hoffman Jr., a principal of Colliers ABR, who handles the building's leasing.

The Chrysler Building, too, is renting up. Physicians Health Service recently took 18,000 square feet. Mr. Cohen, who handles the building's leasing, says -- although he offers no examples -- that he is seeing many would-be returnees from Midtown South.

"They miss the commuting convenience, and they miss being near the hotels where their out-of-town customers stay," he said.

Mr. Ward says that the Mobil building also is being visited by some of the area's defectors. "They discovered that a 10-block walk isn't easy in the morning," he said.

ACTUALLY, the Mobil building is benefiting from more than disillusionment with Midtown South. Hiro Real Estate, which is owned by the Honzawa family of Tokyo, bought the 1.2 million-square-foot building in 1987, just as Mobil was beginning to move out. By the time the big oil company was gone, the recession had hit.

"Hiro wound up with a vacant building at the worst possible time," Mr. Ward said.

Brokers say Hiro did not help the situation. They say it neither modernized the building, nor made the changes necessary to convert it from single-tenant to multitenant use. They say it did not market the space, took forever to approve deals, and would not cut rents to meet the flagging market.

Even worse, the building sits on land that is owned by Goelet Realty, and the ground lease was due to expire in 2013. Many companies balked at moving into a building whose future seemed so uncertain.

"People worry that a landlord won't put money into a building whose ground lease will expire," said Michael R. Laginestra, an executive managing director of the Edward S. Gordon real estate company.

All that is changing now. Last July Hiro hired Mr. Ward and sent two Japanese executives, sons of the owners, to live in New York, thus speeding the decision-making process. They hired Mr. Laginestra's team to lease the building. They are making capital improvements. And they have extended the ground lease to 2028.

Tenants are responding. FCB/Leber Katz took 175,000 square feet last year. Brokers say that the publishing firm Gruner & Jahr is considering 200,000 square feet. And a shipping company that rejected the building a year ago may take 150,000 square feet.

"The ground lease was a big issue for them," said Mr. Meiskin, the company's broker. "They wanted a 20-year commitment with at least two five-year options."

All told, Mr. Ward says that "serious negotiations" are going on for more than 500,000 square feet, and that the building will soon have just 400,000 square feet left. Mr. Laginestra is even more optimistic: He predicts that the building will be 90 percent leased by this time next year.

Its prospects are certainly helped by the growing scarcity of huge blocks of contiguous space in the area. For a time it seemed that 685 Third Avenue, the 615,000-square-foot former American Home Products headquarters at 43d Street, would provide major competition. Leucadia National, which bought the two-thirds-empty building two years ago, pumped nearly $10 million into refurbishing it, and was expecting to market space early this year.

Instead, it is looking for a company to buy the building for its own use. "An investor won't buy it because you can't get financing for a building that is two-thirds vacant," said Mark Hornstein, a Leucadia vice president. "But for a user that wants to own its headquarters, it makes sense."

Any buyer will most likely come from outside the area. After all, the small service companies that have traditionally been Grand Central's mainstay tenants rarely need a full floor, let alone an entire building.

But, the neighborhood's boosters insist, it is such small companies that will, in aggregate, drive the street's revival.

"This street is dotted with buildings that cater to Mr. Jones from Bronxville, who maybe has a three-person law firm, who loves the convenience, but who didn't sign a new lease until the neighborhood got nicer," said Daniel Biederman, head of the Grand Central Partnership.

MANY leasing agents have set their sights on such tenants. Several, including those at 60 East 42d and 110 East 42d, have been prebuilding vacant space, so that small companies can move in immediately upon signing a lease. They have also successfully wooed larger companies in neighboring buildings that need expansion space.

For example, the big law firm Morgan, Lewis & Bockius, a major tenant at 101 Park Avenue, at 41st Street, has been growing, and just rented 17,000 square feet at 110 East 42d Street to handle its overflow.

Brokers predict that Grand Central Terminal's makeover, combined with West 42d Street's renaissance, will cement East 42d Street's future.

By the end of 1998 the terminal should sport an overhauled ceiling, a couple of new entrances, new restaurants in the concourse, a covered marketplace with fresh produce and meat, and as many as 100 stores, compared with just 40 today.

"The street has much greater future value than current value," Mr. Hoffman said. "It's going to be just one wonderful strip mall, with a Times Square anchor on the West, a U.N. anchor on the east, Bryant Park and Grand Central Terminal in the middle. This is going to be one of the most recognizable addresses in the world."

Actually, it already is. But this time, landlords hope, it will be recognized for something nice.