There was a time when it seemed certain 11 Times Square would command some of the highest rents in city.
The building, which was developed by a venture between SJP Properties and its equity partner Prudential, was finished in 2010. As one of the newest buildings in Midtown, it is widely considered state-of-the-art, with many of the bells and whistles that tenants are supposed to be willing to pay a premium for, such as towering ceiling heights, LEED-certified efficient systems, a floor-to-ceiling glass façade that offers prodigious light and few structural columns to impede the efficiency of its spaces.
Entering the market at a tough juncture during the recession, SJP Properties nonetheless appeared to take a hard line on rents, and rightfully so: the building cost more than $1 billion to develop. According to several sources familiar with the property and its leasing history, the landlord held fast to projections it had set before the downturn—rents in the $80s per square foot and beyond.
But SJP and Prudential have since appeared to dramatically change tack. Increasingly wary of the vacancy that has lingered at the roughly 1-million-square-foot tower, the partnership is in the process of arranging a nearly 400,000-square-foot deal with the software and technology giant Microsoft. The lease, rumors of which have been circulating in the city’s real estate industry for weeks, is said to be for rents around $60 per square foot, which many leasing experts have called a sizeable discount from what the building owners were originally seeking.
Factoring heavily in the apparent bargain are rich incentives SJP is said to be offering on top of the low rental rate.
“The talk is rents in the $60s per square foot, with around $100 per square foot in work and free rent for at least a year, maybe longer,” Joseph Harbert, president of Colliers International’s eastern region, told The Commercial Observer. “It’s a very aggressive deal. It has been an asset that has taken a long time to rent. They clearly reached for this tenant.”
Prudential has acknowledged the challenges. In recent weeks, an executive was quoted as saying the company would likely not have invested in the speculative tower had it known how difficult it would be to lease it.
Though many leasing experts believe the building has special challenges, such as its proximity to the gritty Port Authority Bus Terminal across Eighth Avenue, the situation at 11 Times Square would appear to highlight a troubling undercurrent in the market. There’s no doubt that the city’s real estate market has bounced back from the serious recession that brought rents crashing down, nor that individual neighborhoods such as Midtown South, despite the lethargy in other areas, have risen to unprecedented popularity. Yet large vacancies have also continued to fester, and big tenants have appeared slow or unwilling to make commitments, giving the sense that a Manhattan recovery, which only a year ago appeared ready to absorb major new office development projects such as those on the far West Side or the World Trade Center site, has begun to stagnate.
“The large corporate users are the area of the market that has been the most sluggish,” Ken McCarthy, an economist at Cushman & Wakefield, said. “These kinds of companies are not ready to take risk because of the uncertainty.”
According to Mr. McCarthy, between 5.3 and 5.4 million square feet was leased in Manhattan in the third quarter of the year (Mr. McCarthy said he could not provide exact statistics yet, because C&W was still crunching the numbers at press time). The three-month period was in line with the previous two quarters, when 5.4 and 5.8 million square feet were leased, respectively. The totals were below Manhattan’s typical level of activity, which has during the past decade or so averaged around 6 million square feet of activity per quarter, and is well behind the pace of leasing last year, which was 31 percent higher during the same period.
Several theories have emerged as to why Manhattan’s leasing activity has sunk in 2012, prominent among them the uncertainty of divided policies that could stem from the coming presidential election, ongoing economic problems nationally, a cloudy tax and regulatory picture in 2013 and a still roiling European debt crisis.
“It relates to the problems in the Euro Zone and slowing GDP in China combined with a lack of certainty in the U.S. and the next fiscal cliff that we’re facing,” Bruce Mosler, C&W’s chairman of global brokerage and a top dealmaker at the firm, said. “It has created an inability to project where your business will be long term.”
“There’s three fundamental things at play: the election, the fiscal cliff in 2013 and what the impact will be and whether Washington will find solutions,” Peter Hennessy, the New York-area president of the services firm Cassidy Turley. “There are too many things happening at once: the default issues in Europe, the downgrading of debt here a year ago. These things are clogging the system, and they’re being extended—not solved. What business can do is react to problems. What businesses can’t do is react to uncertainty.”
These issues have weighed especially on the city’s biggest taker of office space, the financial sector, which has noticeably dialed back its leasing. Mr. Harbert said Colliers International data shows that law firms were the most active tenant group in the third quarter, a notable change from the industry’s nearly perennial place as the second most active. Much of the slowdown has hence been felt in Midtown, the area of the city most popular among financial tenants, according to Mr. McCarthy.
“The Midtown market, where the large corporate tenants and the financial sector is based in the city, has been the most sluggish,” Mr. McCarthy said. “And when we look at the Midtown market, I expect to see it remain relatively sluggish.”
Leasing in Midtown was down 37 percent from the first three quarters of last year, tallying 3.4 million square feet of activity in the first quarter, 3 million square feet in the second and another 3 million square feet in the third. Each three-month period was lower than the average level of activity in the neighborhood, which is about 4 million square feet per quarter.
The anemic leasing has left both vacancy and rental rates flat in Midtown. C&W calculates current vacancy at 10.4 percent, higher than at the start of the year, when it was 9.4 percent, or a year ago, when it was 10 percent. With slack demand, landlords have not had the leverage to push rents, which have hovered around $66 per square foot on average in Midtown this year, only slightly above the $64 per square foot average a year ago.
Vacancy in Lower Manhattan, another area that has flagged, stands at 9 percent, only slightly lower than at the beginning of the year, when it was 9.5 percent. Averages there are $40 per square foot, the same as last year or the beginning of 2012. As with Midtown, Downtown’s weak statistics stem from below-average leasing activity.
Approximately 1.7 million, 1.1 million and 1.1 million square feet of space were leased, respectively, in the first three quarters of the year, down 31 percent from the first three quarters of 2012. And although Downtown Manhattan has still fared more strongly than many experts had predicted during the downturn, concerns still loom.
Next year, millions of square feet of office space are set to become available at the World Financial Center. The 2-million-square foot skyscraper at 4 World Trade Center is also nearing completion, and Silverstein Properties, the developer of the building, is looking for an anchor tenant for that building’s neighbor 3 World Trade Center.
The space could significantly widen the vacancy rate Downtown at a time when it has been hard for many landlords to secure big tenants.
“If no deals are done for the spaces coming available, we could see vacancy rise Downtown to 16.1 percent, the highest it has been since March 1997, 15 years ago,” Robert Sammons, an economist at Cassidy Turley, said.
Compounding the challenges of lingering vacancies and development projects is the fact that major tenants have shown a preference for renewal deals over relocating, a conservative strategy that most experts say is a response to the times. The year’s two largest leases, for instance, Morgan Stanley’s million-plus-square-foot lease at 1 New York Plaza and Viacom’s 1.6 million deal at 1515 Broadway, were both renewal deals that many experts say will actually yield net vacancy in the market because both companies plan to backfill other office locations into the buildings.
Another hurdle is that large tenants are also beginning to look beyond the city for their space needs, a trend that experts say has come into vogue in the past. Mr. Sammons said that Time Inc., a tenant that is rumored to be looking for well over a million square feet, and other big tenants like NBC are exploring moving some operations currently in Manhattan to lower-cost locations such as New Jersey.
“My understanding is that Time Warner is now doing a study, and by the end of the year they will have to make some decision,” Mr. Sammons said. “NBC is doing a similar evaluation. I think you might see some of these big tenants move jobs out of the city. Everyone is in this cost-saving mode.”
Though he acknowledged that activity would likely be dampened into next year, Mr. Mosler, voicing the sense of optimism expressed by many leasing executives interviewed by The CO, said he felt leasing would pick up, perhaps in the second half of 2013.
“There are also bright spots,” Mr. Mosler said. “If you look at housing nationally, it looks like we have a sustained recovery there and that’s the foundation in many ways for wealth and consumer spending in this country. It’s going to take time for that to filter through the economy but in the second half of ‘13 I definitely see demand improving.”
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