Midtown South: Hitting the Ceiling

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More ominously, CBRE reported that leasing activity last month saw a 5 percent decline from Midtown South’s five-year monthly average of 340,000 square feet. Leasing activity through quarter three of 2013 dropped 22 percent from year-ago levels.  

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Furthermore, a recent report from Ashkán Zandieh of ABS Partners Real Estate, a firm based in the submarket, revealed a slight dip in average asking rents for direct leases between 1,000 and 5,000 square feet. That number dropped to $49.73 from $49.88 between the second and first quarters, hardly cause for panic but a sobering statistic given Midtown South’s robust record. Sublease average asking rents, on the other hand, jumped nearly 6 percent from year-ago levels. 

However minor these blips, real estate experts mostly agreed that Midtown South was just about at its apex. “I don’t see Class A prices continuing to skyrocket,” Mr.  Persichetti said. Mr. Roos concurred, saying that his “visceral reaction is that once you get into the $60s per square foot range in rents, that’s a very full number. I think for the time being that we’re not at the summit, but we’re getting very close.”

“Stabilization is showing its face right now,” Mr. Zandieh said. 

In an interview earlier this year with The Commercial Observer, David Levinson of L&L Holding Company described Midtown South as a “steam valve for an overheated Midtown.” L&L was front and center at the submarket’s hot streak, in particular with 200 Fifth Avenue, the Flatiron District darling whose success buildings throughout the submarket aspire to mimic.  

Now, the so-called Times Square South neighborhood, the Financial District and parts of Brooklyn are welcoming some of Midtown South’s overflow. The CBRE data included a 22 percent increase in year-to-year leasing activity downtown through the third quarter versus Midtown South’s 22 percent decline. Granted, there’s more space to absorb in Lower Manhattan. But the movement of media titans like Condé Nast and HarperCollins, smaller firms like Rock Shrimp Productions and the scrappy WeWork to the Financial District has some people talking about a paradigm shift. 

The Commercial Observer’s Al Barbarino recently noted that 94 tenants have moved south of Canal Street since January 2012, thanks in large part to Class A average rents of $53 per foot that are $22 cheaper (according to Cassidy Turley data) than in Midtown South. Those rents have not soared, but certainly a good number of companies have been priced out of Midtown South and settled in areas slightly north, south and across the river. 

Yet even the brokers who acknowledged a saturation point in the submarket dismissed the idea of an exodus. “There are lots of start-ups,” Mr. Roos said. “The mature ones will want to be in the hot areas where they can find the space. I think the Financial District and Brooklyn offer great opportunities for them.”

Mr. Persichetti thinks that “every tenant has its own situation. Some just want to be in the 23rd Street corridor. Others don’t necessarily have to go with the rest of the flock. And their decision is purely based on what they can afford.”

However obvious the reasons for a Financial District, Garment District or Brooklyn office hunt, logistics still intrude on fledgling tenants looking for a perch. “The Financial District is traditionally the last to rise and first to fall,” Mr. Roos said. “The black hole [in that neighborhood] is the ’60s steel and glass towers, which are commodity products. They’re not terribly cool.”

Speaking of debatable coolness, the maybe-comeback kid Yahoo is one major tech firm that passed on a Midtown South foothold with a 220,000-square-foot lease at The New York Times’s old headquarters on West 43rd Street earlier this year. Meanwhile, the upstart Web fashion platform Refinery 29 recently decamped from Cooper Square to 225 Broadway, nearby frumpy City Hall. Then again, one of the year’s biggest leases was AppNexus’s 220,000-square-foot deal at 28-40 West 23rd Street, in which asking rents approached $60 per foot. 

Hammering home the idea that some Midtown South properties are so popular that no one goes there anymore, Google (GOOGL) is reportedly close to inking a 360,000-square-foot lease at 85 10th Avenue following unsuccessful attempts to expand at its own jam-packed 111 Eighth Avenue. 

Despite the continued heat, Midtown South is unlikely to approach the triple-digit asking rents that are prime Midtown’s exclusive domain. 

“Stuff like that is a phenomenon,” Mr. Zandieh said. “It’s anomalous. And it’s not within this submarket.” Touching on the area’s foundational appeal to younger tenants as an alternative to its starchy northern neighbor, he said, “If you think about it for a second, from a logistics standpoint, Midtown South should not outpace Midtown even if it could.” 

bgray@observer.com