'Space Available: Had Been a Hedge Fund'

By GREGORY MEYER

NEW YORK -- The tide of investors demanding money back from hedge funds is washing into New York-area office buildings, as funds that rented plush space when times were good adopt a sort of austerity.

After driving Manhattan office rents to nearly $200 a square foot, hedge funds are struggling with stingier lenders, investor redemptions and, in many cases, poor returns. As a result, in East Coast hedge fund capitals New York City and Greenwich, Conn., several high-profile hedge funds are scrambling to sublet office space.

"There is certainly a lack of demand from hedge funds," said Evan Margolin, a New York managing director at Studley Inc., a tenant-representation firm. "It's all redemption-driven. Even funds doing well are facing redemptions, and funds not doing well are facing larger redemptions."

In Manhattan, hedge funds Duff Capital Advisors, RiverPark Capital, SAB Capital and Sansar Capital Management are among those with Midtown space to sublet, real-estate brokers say. Twenty-eight miles northeast in Greenwich, Duff Capital and quantitative fund firm AQR Capital Management have spare square footage.

The situation is a far cry from just a year ago when firms were willing to pay millions to outfit office space with backup power systems, in-house gyms and large pantries for catered lunches. A handful of skyscrapers near the southeast corner of Central Park commanded the highest rents, in some cases near $200 a square foot.

"Over the last few years ostentatiousness was in and having space in the top of towers with phenomenal Central Park views was highly coveted," said Ben Friedland, a senior vice president at CB Richard Ellis Group Inc. "Now as a money manager in the world we're in you have to weigh what message that gives off."

Posh Sublets

The moves to downsize follow unprecedented pain in the hedge-fund industry.

Funds as a group were down about 18% through November and in the third quarter of this year fund closings exceeded launches for the first time in more than a decade, according to Hedge Fund Research.

SAB Capital Management, founded by Scott A. Bommer, has about 11,000 square feet to sublet on the 21st floor of the General Motors Building, a premium Manhattan tower across New York's Fifth Avenue from the Plaza Hotel. SAB didn't respond to requests for comment.

Amber Capital, a hedge fund run by Michel Brogard and housed inside the slant-roofed Citigroup Center on East 53rd Street in New York City, is seeking subtenants for the 31,000-square-foot floor it leased through 2016, according to a marketing brochure for the space.

Duff Capital, founded by Phil Duff, is trying to sublet about 11,000 square feet on Park Avenue in Manhattan, as well as 15,000 square feet in the former Greenwich headquarters of tobacco company UST Inc. Duff Capital is reducing space and "looking at various options," a firm spokeswoman said. She wouldn't give a reason behind the moves.

AQR, with assets of more than $20 billion, is based in Greenwich Plaza, a 300,000-square-foot office complex next to the Greenwich train station. It shares the building with hedge-fund tenants including Lone Pine Capital, JD Capital Management and FrontPoint Partners, which was co-founded by Mr. Duff. AQR has been attempting to sublease 65,000 square feet in another Greenwich office building. A source with knowledge of the firm said it is pruning operations for the first time since it was founded.

Thinking Short Term

Hedge funds are plunging into subleasing just as the Manhattan office market softens. The island's vacancy rate for Class A buildings in November was 8.7%, the highest level in more than three years, according to Colliers ABR Inc. Sublease availability is up nearly 150% for the year to date, the real-estate firm said.

Hedge funds that need to renew leases are in many cases looking for short-term extensions on the expectation rents will drop. Over the years, rent wasn't the biggest factor for hedge funds scouting office space "because if the business was working, the rent was a small component of their profits. It made no difference whether they paid $100 a foot or $150 a foot," Mr. Margolin said.

—Joseph Checkler contributed to this article.

Write to Gregory Meyer at greg.meyer@dowjones.com

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