As the World Turns: Leasing Activity Impact Markets First, Then Owners
By Jotham Sederstrom September 19, 2012 7:00 am
reprintsThe vacancy rate in the Downtown market has continued to drop since the third quarter of 2011, when it was 9.9 percent, according to a report from Cushman & Wakefield. It currently sits at 8.9 percent. Asking rents have decreased slightly to $40.06 per square foot from $40.18 per square foot last quarter, according to the report, and the influx of even more space may push tenants farther downtown.
“Historically, Midtown was the location that companies flocked to for affordable rent following a recession, but that’s not the case this time,” said Ken McCarthy, senior economist and senior managing director at Cushman & Wakefield, in a recent market report. “Instead, we’ve seen companies look for space in the Midtown South submarket, and it’s so tight there that tenants are looking at neighboring Downtown and lower Midtown, such as the Garment District.”
No company fits that description better than media conglomerate Condé Nast, which will leave its Times Square digs behind for 1 million square feet as the anchor tenant in 1 WTC in 2015. Marketing and advertising research company Nielsen is also in talks to lease 160,000 square feet in MetLife’s 85 Broad Street tower, moving away from its Vornado Realty Trust (VNO)-owned building at 770 Broadway, according to the Wall Street Journal.
“Tenants are going farther afield to satisfy their space requirements,” said Steven Durels, director of leasing and real property at SL Green (SLG), during a July 27 conference call. “That may mean a tenant who is on Fifth Avenue, who you normally thought was going to stay in another two- or three-block radius of the current space, is now opening it up and saying, ‘I’ll go to Midtown South because I just like the lifestyle,’ or ‘I’ll go farther west because I’m chasing a lower rate.’”
But perhaps the two factors that will dictate where big tenants will decide to locate themselves will hinge on this: asking rents in Midtown are up more than four dollars compared with last year, $64.46 per square foot in July 2012 compared with $60.18 per square foot in July 2011, despite the fact that the vacancy rate actually increased 0.5 percentage points, from 7.7 percent to 8.2 percent, according to data from CBRE (CBRE).
The other key: Midtown South only has seven available blocks of space greater than 100,000 square feet, down by more than half since 2009, according to Cushman & Wakefield.
“The thing that Downtown can do that Midtown can’t, is that the Downtown market can lease very large blocks of space and accommodate that size,” said Andrew Levin, senior vice president of leasing at Boston Properties (BXP), which operates eight properties in Manhattan totalling more than 8.6 million square feet.
Still, Mr. Levin said, the draw for companies to move into Midtown has not declined, and leasing velocity and pricing are both stable in the neighborhood.
“Midtown Manhattan for Class A office space is a fixed-supply market,” he said. “If we’re at stable levels, then we’re doing well.”
Boston Properties is set to boost that market when it opens the 1.1-million-square-foot tower known as 250 West 55th Street in 2014. Law firm Morrison Foerster has signed up for space at the building, and reportedly law firm Kaye Scholar will take space there as well.
“Every 10 to 15 years, the market needs that introduction of new stock, of new property for companies to move and expand into,” said Dave Cheikin, vice president of leasing at Brookfield (BN) Properties. “The benefit of the New York City economy is that it’s diversified enough that if it flips around, it can still be steady.”
