10 MetroTech. (Photo courtesy Forest City Ratner)

That means a new residential building at 625 Fulton Street just east of Flatbush Avenue will be coupled with 80 DeKalb, the 34-story residential tower Forest City built at the north end of the parcel. The site is also located between Hudson Avenue and Rockwell Place.

The seven-story 359,000 square-foot building known as Ten MetroTech Center for years housed the Internal Revenue Service and the state Department of Motor Vehicles, but such major tenants moved out years ago to other Forest City properties.

The structure is a former Barton's candy factory, which closed in 1981 and, according to a June 1985 article in the New York Times, was in converted to office space. Forest City Ratner bought the property in 1989 and branded it as 10 MetroTech, though it is located east of Flatbush, well southeast of the MetroTech campus.

Crain's reported in March 2010 that Forest City had failed to make a mortgage payment on $52 million loan for the building.

80 DeKalb.

Parent Forest City Enterprises Form 10-Q quarterly report to the SEC, released yesterday, revealed that the building's $40 million nonrecourse mortgage "technically remains in default," but the developer was not in jeopardy of losing the building.

Last August, Forest City "effectively restructured" the mortgage, with the new lender agreeing to hold off on foreclosure proceedings for two years, "as long as we comply with the terms of this forbearance agreement."

Yesterday, during a conference call with investment analysts, Forest City executives were asked about the building. "An investor purchased the debt from the existing debt holder and we made an agreement with that new investor to take a look at what the best use of the property was," CEO David LaRue explained.

They decided, LaRue recounted, that the best use was to "take the building down. It has zoning in place that we can convert that building to residential property."

LaRue did not provide details on the size of the build, but, according to the city's zoning map, the C6-4 zoning at the site offers an FAR (Floor Area Ratio) of 10, though 80 DeKalb likely used some of the overall parcel's available development rights. Nor did he mention whether Forest City's new factory for modular construction, established in the Navy Yard in partnership with Skanska to build towers for Atlantic Yards, would be used.

The demolition is scheduled for September, according to the 10-Q report. Among the more recent tenants was Brooklyn United for Innovative Local Development (BUILD), a nonprofit group that signed the Atlantic Yards Community Benefits Agreement and was funded by Forest City. BUILD closed last November.

5. Flatiron/Union Square – 2.9 percent of its inventory was leased or renewed during the first four months of 2013, led by AppNexus’s 222,000-square-foot renewal and expansion at 28-40 West 23rd Street. Shockingly, this is the only Midtown South submarket represented in the Power 5.

4. Grand Central – 3.2 percent of its inventory was leased or renewed through April. This is so despite its current availability rate of 15.3 percent, as 750,000 square feet of renewals between Simpson Thacher and EisnerAmper skews its number. Then again, aren’t all polls skewed in some way?

3. City Hall/Insurance – With 4.6 percent of its inventory leased or renewed, City Hall comes in as the biggest surprise in this year’s Power 5. Being the smallest submarket in the poll does help, but the uptick in demand for Downtown space also has a hand in this ranking. If this were the Power 7, all three Downtown submarkets would be accounted for, as the World Trade Center and Financial submarkets ranked sixth and seventh.

2. Penn Plaza/Hudson Yards – The soon-to-be hottest submarket on the planet witnessed the leasing of 5.5 percent of its inventory this year, and that does not include the leasing activity in buildings under construction. The Macy’s renewal at 11 Penn Plaza for 646,000 square feet assisted in getting this submarket into the top two.

1. Fifth/Madison – Is top-tier space making its comeback? A total of 6.3 percent of the inventory was leased or renewed through April. The Sony renewal of 798,000 square feet at 550 Madison and Jefferies Group’s 457,000-square-foot renewal at 520 Madison Avenue fueled this ranking, but it also ranked third in total leases signed, with 34.

Richard Persichetti is the vice president of research, marketing and consulting at Cassidy Turley, with 14 years of NYC research experience.

The Keynesians are euphoric. From their vantage point, the case against borrowing has collapsed like a house of cards. The headline facts are compelling. Austerity in Europe has deepened the Continent’s economic malaise, affording unfavorable comparisons to the Great Depression. Just in time for the sequester, the American economy is repeating its own pattern of springtime stumbling. The risks of expansionary monetary policy seem misplaced. Inflationary pressures are ebbing on both sides of the Atlantic. At the Bank of Japan, all vestiges of reserve in monetary policy have been cast aside.

From his bully pulpit at the Gray Lady, Professor Paul Krugman this weekend declared victory over the Austerians and a puritan worldview of economic inequality. It seems that proponents of restraint during downturns are not only misguided in their thinking. At least a few of them fit conveniently into the larger narrative of class conflict. How consistent that we cannot disagree without our respective motives being questioned. There is a difference between fiscal expansion and structurally unsustainable deficits, but such nuance is tedious. So is the idea that we can have different solutions for different circumstances.

Instead, some advocates of fiscal expansion are revealing themselves as ideologues to rival fiscal conservatives. Maybe that brings things into balance. On the political right, there seems no willingness to trade long-term structural solutions for short-term policies that will help lift employment.

In other parts of the world, positions are not always as intractable as they are in the United States. In the countries where austerity has been pursued with the greatest zeal by external agents and where it may be proving most self-defeating, that flexibility is fortuitous. This could prove another decisive week in Europe’s coquetry with fiscal discipline. At long last and after rejecting severe budget cuts, Italy will have a prime minister less inclined to see unemployment rise unchecked. Germany’s finance minister will visit with his counterpart in Spain, where the official unemployment rate has surpassed 27 percent, to discuss an investment program that may signal a softening stance in Berlin.

There are holdouts who remain skeptical about the consequences of deficits, even if they are only incurred in the toughest of times. In Canada, the Tory government is poised to balance the federal budget in 2015. To get there, spending growth has been limited to 1 percent. Canadian conservatives, who are not conservative by American standards, see it as targeted investment. Their even more liberal counterparts, mindful of inflation, point to a drop in real spending and rather severe cuts to direct expenditures.

If there is a country that can afford stimulus, it is Canada. The economy is slowing and household debt levels are elevated. There is a good argument that stimulus will lift the economy while delaying the return to surpluses only temporarily.

Of course, there is an election scheduled for 2015. And for all their liberalism, the Canadians are far more budget-conscious than their southerly cousins.

dsc@chandan.com

Sam Chandan, Ph.D., is president and chief economist of Chandan Economics and an adjunct professor at the Wharton School.

The Manhattan submarket (defined as south of 96th Street on the East Side and south of 110th Street on the West Side) led the way in the first quarter of 2013 with $5.5 billion in investment sales transactions. This represented 85 percent of the $6.5 billion citywide total.

As expected, the $5.5 billion was significantly lower than fourth-quarter 2012 totals, as the end-of-year rush to take advantage of lower capital gains rates created an epic quarter in which sales volume hit $14.6 billion, the second-highest quarterly total in history (The first quarter of 2007 was the peak, with $17.2 billion). The good news is that the $5.5 billion was much better than we anticipated.

In 2012, there was a total of $31.3 billion of investment sales activity in the Manhattan submarket. Annualizing the first quarter of 2013’s $5.5 billion, we are on pace for about $22 billion this year. However, we feel that the 2013 total will rival, if not exceed, the $31 billion seen in 2012 as activity picks up throughout the year.

As expected, 2012 was a very active year, due to the impact an anticipated increase in taxes had on seller behavior. An externality like the capital gains tax increase has two tangible effects. First, it serves to catalyze some transactions that might not have occurred otherwise, as sellers realize that a window of opportunity may be closing. Second, it pulls activity from future periods forward, as sellers who were anticipating selling in early 2013 accelerated their process to close before the end of last year, achieving higher after-tax proceeds than they would have had they sold this year.

Tax policy transparently impacts market participant behavior. Last year we saw a record number of properties sold in Manhattan as the turnover of the total stock of properties reached 4.3 percent, an all-time record. The previous high was achieved in 1998 when, under the Clinton administration, capital gains taxes were reduced from 28 percent to 20 percent. Another spike in sales occurred in 1986, prior to tax policies of the Tax Reform Act of 1986 kicking in at the beginning of 1987.

In the first quarter of 2013, there were 130 properties sold in the Manhattan submarket. This was down significantly from the 484 properties sold in the fourth quarter of 2012. Again, this was not surprising, as the fourth-quarter 2012 total set an all-time record for Manhattan, as did 2012’s yearly total of 1,194, eclipsing the 999 properties sold in 2007.

Coming off this record year, we expected the number of properties sold to be down, and while it was, the 130 sales were more than we anticipated. We believe this is another positive sign for the balance of 2013.
While we expect the number of properties sold in the Manhattan submarket to drop by 20 to 25 percent this year from last year’s total, we fully expect the dollar volume to be about where it was last year if not higher, given what we expect will be a resurgence in large office building sales, which impact dollar volume greatly.

Perhaps one of the most surprising trends in the Manhattan submarket in the first quarter of 2013 has been the incredible run-up in land values over a relatively short period of time. According to the transactions we have been working on, we believe that land values have appreciated by as much as 30 percent in the past three months alone.

We are seeing tremendous demand from local developers, as well as from developers from around the country who do not own anything in New York yet but are looking to get into the market. Joining them are foreign developers who are looking to do their first projects in New York City. We expect that land values will continue to rise throughout the year and may end the year as much as 50 percent higher than the averages we saw in 2012.

rknakal@masseyknakal.com

Robert Knakal is the chairman and founding partner of Massey Knakal Realty Services; in his career he has brokered the sale of more than 1,300 properties, with a market value in excess of $9 billion.

In the latest sign of the evolution of Manhattan’s former no-man’s land between Midtown and Downtown into the hottest office submarket in the U.S., Cushman & Wakefield last week noted a migration of financial firms into Midtown South and a corresponding overflow of technology and media firms into the Financial District over the past 10 years.

“We’ve never seen such an intertwining of the Midtown South market and Downtown,” Andrew Peretz, executive vice president at C&W, said in an interview.

The “invisible dividing line” at Chambers Street or Canal Street that used to separate financial companies from more creative industries to the north has virtually disappeared, he said.

Financial companies now occupy 6.4 percent of the office space in Midtown South, up from zero a decade ago, C&W said in its quarterly update on the Manhattan office market. Information, media and technology companies—the kind normally associated with the converted warehouses and low-lying buildings between Canal Street and 32nd Street—have increased their share of Downtown by a factor of 10 to 20 percent. Financial users’ share of Downtown space has plunged to 7.4 percent from one-third in 2003.

The changes mark a more cost-conscious attitude and a smaller role played by the financial industry in New York’s economy—as well as the increasing importance new media and technology firms, which have raised their share of the Midtown South market to more than 38 percent from 27 percent a decade ago. The evolving tenant makeup also shows a shift in development strategy, as landlords and developers seek to emulate the kind of “live, work and play” environment that drew entrepreneurial tenants to Midtown South and created a more vibrant atmosphere Downtown as older office buildings were converted to residential use.

“Midtown South right now is the healthiest submarket in the country,” Mr. Peretz said. “Demand is very strong. In the last 14 quarters, [leasing] activity in Midtown South has exceeded the 10-year quarterly rolling average—a direct reflection of space being taken off the market.”

Technology entrepreneurs have been drawn into the area, he said, by the “gravitational pull” of Google Inc., which bought the 2.9-million-square-foot Art Deco building at 111 Eighth Avenue in 2010 and has since expanded in the Chelsea Market.

Brokers said the district has also proved alluring to private equity and hedge fund owners, who have set up shop near the hot residential areas of Tribeca and Chelsea where they live. Financial tenants in the area range from Paul Tudor Jones’s Tudor Investment Corp., which has offices at 401 West 14th Street, and Two Sigma Investments LLC, at 100 Avenue of the Americas, to investment banking companies such as Credit Suisse Group in and around 11 Madison Avenue.

The submarket’s vacancy rate of 6.9 percent at the end of the first quarter makes Midtown South “a market that’s beyond equilibrium,” and well into being “a landlord’s market,” said Mr. Peretz, who estimated that the balance of power between owner and tenant in New York tips at a vacancy rate of 8 or 9 percent. Net effective rents in the area are up 70 percent since the recession ended, he said.

Total weighted average rent in Midtown South at the end of March stood at $51.97 a square foot, compared with $40.28 Downtown and $66.34 in the Midtown market, Cushman & Wakefield data show.

CBRE reports the top leasing transactions in the first two months of the year included J.Crew Group Inc.’s expansion by almost 80,000 square feet of space at 770 Broadway, a 22,000-square-foot renewal and expansion at 609 Greenwich Street by ITV Studios, and Syracuse University’s lease on 22,000 square feet at 136 Madison Avenue.

Major new availabilities included 117,000 square feet of Credit Suisse sublease space at 315 Park Avenue South, 84,000 square feet of Kaplan Educational Centers sublease space at 395 Hudson Street and 60,000 square feet at 85 10th Avenue, CBRE found.

Rents and the type of space found in Midtown South vary widely, and some recent leasing activity has reflected moves within the district. In a deal brokered by Adams & Co., marketing and branding company And Partners is moving from space on West 27th Street to a 5,000-square-foot office at 121 East 24th Street, at an asking rent of $45 a square foot.

Midtown South’s smaller floorplates and “older vintage” buildings may accelerate the migration to other areas as entrepreneurial firms mature and grow, said Justin Halpern, vice president of tenant representation at Cresa New York.

Avison Young counts only six blocks of space bigger than 100,000 square feet available in the Midtown South, compared with 22 Downtown.

“This used to be the low-cost alternative,” Mr. Halpern said. “Downtown is the No. 1 beneficiary” as would-be Midtown South tenants seek lower rents, and “Grand Central may be the next best bet.”

Ira Z. Fishman, the president of Winoker Realty Co., who chairs the Midtown South committee at the Real Estate Board of New York, said the panel had a visit recently from a representative of the group’s Grand Central committee who was looking for overflow business.

“Maybe you can bring some people to Grand Central, where you can save some money,” Mr. Fishman quoted the visitor as saying.

New construction in Midtown South is limited to a handful of projects, the biggest of which is a 430,000-square-foot building at 51 Astor Place, due to open next month. Developer Edward J. Minskoff and broker Paul Glickman, vice chairman at Jones Lang LaSalle, said the property offers the 14- to 18-foot ceiling heights and open work spaces that Midtown South tenants like—along with state-of-the-art technology that isn’t available in 90 percent of the buildings in the area. It’s within walking distance of four hotels and “dozens of great restaurants,” Mr. Minskoff said.

The property has attracted strong interest from prospective tenants, Messrs. Minskoff and Glickman said, including companies vying to anchor the building and put their brand on the neighborhood, just as Google  put its mark on the western part of the district.

“It’s a change in the neighborhood for the good,” said Mr. Minskoff, who is seeking rents ranging from the mid-$80s to as much as $115 a square foot.

On the western side of the district, developer Christopher Albanese, principal in the Albanese Organization, said he hopes to begin construction of a 169,000-square-foot building with frontage on the High Line park by the end of the year and to have it ready for occupancy 14 to 18 months later. Rents will range from the mid-$70s to the mid-$90s per square foot, he said.

In the Meatpacking District, Taconic Investment Partners and Thor Equities have broken ground on a 55,000-square-foot office and retail building at 837 Washington Street, which the developers expect to complete in the first quarter.

In all, the new construction won’t be enough to increase the vacancy rate or curb rents in the district, where inventory totals more than 65 million square feet of office space, according to C&W data. The migration to Downtown and Midtown is likely to continue, as tenants who signed leases in the high $30s per square foot experience “sticker shock” when time comes to renew, said Gregory Kraut, principal and managing director of Avison Young.

Some of the new developments, meanwhile, may be out of character with the gritty, non-corporate ambiance that attracted companies to the area, said Andrew Berman, executive director of Greenwich Village Society for Historic Preservation. The group opposed the zoning for 51 Astor Place on the basis of its size, even though the Cooper Union building it replaced was “no treasure,” he said.

With the construction of 51 Astor Place and the nearby Sculpture for Living apartment building, “that intersection’s almost unrecognizable,” Mr. Berman said. “There was room for improvement, but I fear it looks like an office park in the suburbs of Dallas rather than the gateway to the East Village.”

Midtown South’s success has created a model for the redevelopment of industrial areas and older office districts throughout the city and country. Matthew E. Galligan, group president of CIT Real Estate Finance, said olderMidtown office buildings may be converted to residential use, to create a similar “24/7” live-and-work environment and spur demand for new office construction, while more warehouse areas along the Brooklyn waterfront are likely to converted to residential and office use.

A similar dynamic is at work in San Francisco, as technology companies, which typically employ the kind of workers who want to come to work “on a skateboard,” move in from the suburbs, Mr. Galligan said.

For now, Midtown South brokers and property owners are still waiting for rents to hit a plateau.

“I still think people would prefer to be in Midtown South and pay a little more,” said Bradley Gerla, executive vice president of CBRE’s Downtown office.

“Nobody really balks at $60 a foot,” said Andrew Roos, vice chairman at Colliers International. “I don’t know what happens if it gets to $70. I don’t see it dropping back to $30.”

With construction getting under way on millions of square feet of planned Class A offices on the West Side, much of the leasing action for the year to date has centered on neighborhoods like Murray Hill, the Penn Station area and the Garment District, which are attracting companies that have been priced—or crowded—out of the technology hub in Midtown South, brokers said. Financial companies, traditionally the biggest occupiers of Midtown real estate, remained conservative, pursuing greater efficiency in their use of real estate rather than growth.

“The days of bigger is better are gone,” said Eric Thomas, senior vice president of Cresa, a specialist in tenant representation. “Capital preservation is still key. That’s why renewals still reign in many cases.”

While leasing activity in the first two months of 2013 increased 8.6 percent from a year earlier to more than 2.1 million square feet, the vacancy rate at the end of February edged 0.2 percentage points higher to 10.2 percent, according to Cushman & Wakefield data.

February leasing totaled 830,000 square feet in the Midtown market, short of the five-year average of 1.14 million square feet, according to CBRE figures. Absorption in the first two months of the year was negative 1.32 million square feet, an improvement over the negative 1.59 million square feet in the same period last year. Average asking rents remained the highest in the nation, at $70.25 at the year’s end, ahead of $56.25 in Midtown South, now the second most expensive U.S. market, and $52.08 in third-ranked Washington, D.C., CBRE data shows.

Among the biggest recent lease deals were a renewal by Macy’s Inc. on about 646,000 square feet at 11 Penn Plaza, a new lease on a nearly 44,500-square-foot space at 485 Lexington Ave. by Value Line Inc. and a deal by Univision Communications Inc. on more than 39,700 square feet at 605 Third Avenue—which was an expansion, according to CBRE data. Major new available spaces include 254,000 square feet of AXA Financial sublease space at 1290 Avenue of the Americas, 159,000 square feet at 730 Third Avenue and 88,000 square feet at 125 Park Avenue.

The AXA space added to a glut of available offices in the Rockefeller Center/Avenue of the Americas corridor, which had negative absorption of 1.3 million square feet in the fourth quarter, according to CBRE.

For the past year, financial firms have been “almost out of the marketplace,” and “when possible, they’ve renewed in place,” due in part to the high cost of building space suited for activities such as trading, said Mark Ravesloot, vice chairman of CBRE. He expects the vacant spaces along Avenue of the Americas to be absorbed, as the large floorplates, transportation and amenities in the area attract users. Most of the AXA space is “already spoken for,” he said.

A “flight to value” has driven vacancies lower and rents higher in Midtown’s less expensive submarkets, according to Jones Lang LaSalle. The vacancy rate for Class A offices in the Penn Plaza/Garment District area has dropped to 5.6 percent as asking rents averaged $58.28 a foot. That compares with a vacancy rate of 13.4 percent for Class A space in the Plaza district, JLL found. Rents averaged $79.31 a foot in Class A properties in the Plaza district, an area that accounted for 23 percent of inventory and only 12 percent of the top 25 lease deals this year through March 21.

“The velocity of leasing activity is very good,” said Peter Riguardi, president of JLL’s New York operations. Many of the tenants JLL represents, however, are “chasing same amount of space or less space” when they move, due to a lack of job growth and corporate strategies aimed at making more efficient use of real estate. “The net of all this is [that it’s] not certain we’re going to have positive absorption in Midtown” this year, Mr. Riguardi said.

One beneficiary of the trend toward value is W&H Properties, which controls a portfolio of prewar trophy towers including the Empire State Building, where image licensing company Shutterstock Inc. just signed a lease for more than 80,000 square feet. Thomas Durels, executive vice president of Malkin Holdings, which supervises W&H’s portfolio, said Shutterstock will move from Downtown Manhattan and occupy the 20th and 21st floors.

Mr. Durels said the first 21 floors of the tower are now leased to just four companies—Li & Fung USA, the Federal Deposit Insurance Corp., Coty Inc. and Shutterstock—as a strategy to consolidate spaces in the building and lease full floors to “quality tenants” pays off.

In addition to the Empire State Building, W&H properties include modernized prewar buildings along the Broadway corridor, where a diverse mix of tenants is entering what was formerly known as a fashion district. At a number of its properties, W&H is in “serious negotiations with several legal and advertising firms looking to expand their footprint to accommodate new hires,” Mr. Durels said. He suggested that price is an important factor, with activity “strong” for properties that rent for $49 to $50 a foot, and “sluggish where asking rents are north of $70.”
SL Green Realty Corp., New York’s largest office landlord, leased almost 458,000 square feet of space in its buildings in the first two months of the year, including a 151,000-square-foot lease by Eisner Amper at 750 Third Avenue. The real estate investment trust reported having another 600,000 square feet of space in its deal pipeline.
“Our results and activity since January have far outpaced our expectations,” Chief Executive Officer Marc Holliday said in a press release.

Brokers and developers expressed confidence that demand will be sufficient to fuel the expansion of the Midtown office market to the West Side, where more than 16 million square feet will be built in coming years by developers including Sherwood Equities, Moinian Group, Brookfield Office Properties, Extell Development Co. and Related Companies.

Jay Cross, president of Related Hudson Yards, said the initial 1.7-million-square-foot tower—the first of the West Side projects to break ground—is attracting interest from “every sector” and that financial companies are “getting more active.” While the big banks and investment firms remain uncertain about making moves in the short term, he said, most of them currently occupy older buildings and are starting to make long-term plans to relocate to newer space, which will create demand for the West Side projects even if the banks are consolidating operations.

For a big financial company, moving “is like turning a super tanker,” he said. “It’s not inappropriate for them to begin thinking about where they’re going to be in five years.”

Related Hudson Yards’ first tower, scheduled to open in mid-2015, will be anchored by Coach Inc., which will own its space as a commercial condo. Related plans a total of six million square feet of office space in the mixed-use development, including a 2.4-million-square-foot office tower that won’t come online until 2018. A mixed-use building coming online in 2017 will include additional office space as well as hotel, residential and retail space and an Equinox gym.

“The large-block tenants—north of 300,000 square feet—are considering it,” said Jared Horowitz, executive director at Cushman & Wakefield. “Tenants that size typically do look out that far.”

Other planned developments at Hudson Yards include 2.5 million square feet of office space by Sherwood, 1.8 million square feet by Monian, 1.78 million square feet by Extell, and four million square feet by Brookfield, which has broken ground on the platform over the West Side rails for its project.

While those offices are likely to find tenants, some brokers said, the bigger issue is who will rent the spaces that are vacated in the westward migration. Some speculated that the planned conversion of the Sony Building at 55th Street and Madison Avenue to hotel and residential use will be the start of a Midtown trend, similar to the transformation older office buildings have undergone in the Financial District.

One rumored candidate for conversion is 650 Madison Avenue. That property is being marketed by Eastdil Secured, which brokered the sale of the Sony Building for $1.1 billion to developer Joseph Chetrit. Eastdil didn’t respond to a request for comment.

Still, some brokers said the financial companies may be on the verge of jumping back into the market for more space, which would help reduce vacancies in the Rockefeller Center/Avenue of the Americas area and in the expensive Plaza district.

“We’re all optimistic,” JLL’s Mr. Riguardi said. The improving stock market and business climate suggests that companies may soon increase spending on technology and hiring, he said.

“Activity is slowly picking up,” Mr. Horowitz said. Once the market is cleared of cheaper sublease space, direct leasing is likely to pick up, eventually leading to increasing rents.

He even sees potential demand for space with asking rents in excess of $100, at properties including 650 Madison Avenue, where C&W is the leasing agent.

“We’re seeing activity from brokers representing financial institutions,” Mr. Horowitz said. “The rents aren’t scaring them.”

While the story in Midtown South over the past two years has inarguably been Class B and, to a lesser extent, Class C buildings and their increasing cachet among tech startups, the story in lower Manhattan is still all about Class A properties. With approximately five million square feet of new inventory coming online next year with the completion of 1 World Trade Center, the market will boast some of the most efficient and modern space in all of Manhattan.

More immediately, however, approximately two million square feet of space at the World Financial Center is expected to be made available by next month, thanks to lease rollovers by Nomura and Deloitte, among other major tenants. With such availability of Class A space, no wonder the asset class saw a 30 percent uptick in leasing from last February. Jonathan Mazur, director of research at Cushman & Wakefield, clued The Commercial Observer in on some other big statistical changes in lower Manhattan last week and gave us a sense of what’s to come in 2013.

Even with construction scaffolds clogging the district’s narrow streets in a reminder of  Hurricane Sandy’s devastation, Downtown office leasing activity jumped 73 percent in the first two months of the year, according to Cushman & Wakefield.

The firm’s data shows a spike in larger transactions, with leases on spaces 50,000 square feet or larger increasing to seven, from two a year earlier. That’s a sign that the market has “momentum,” just when as much as five million square feet of World Trade Center space is about to added to the inventory, said Jonathan Mazur, C&W’s director of research.

Technology-oriented companies such as GFK Market Research and WeWork are moving into the area south of Canal Street as rents rise and vacancies dwindle in Midtown South, the city’s burgeoning tech center. Brokers say the newcomers, led by bigger creative companies like Condé Nast and HarperCollins, are attracted not only by cheaper rents but also by the convenience and excitement that will come with the opening of the transportation hub, restaurants and retail outlets at the new World Trade Center. Developer Larry Silverstein, president and chief executive officer of Silverstein Properties, predicted that the project will have a “far greater” impact than Rockefeller Center had on Midtown in the 1930s.

The Durst Organization, which oversees the construction, leasing and management of 1 World Trade Center, and Silverstein, which controls four other towers in the complex, report strong interest from prospective tenants touring their properties, as does Brookfield Office Properties, currently the biggest Downtown landlord. Mr. Silverstein said that 4 World Trade Center, scheduled to open this year, is about 50 percent leased and that he is negotiating deals that will be sufficient to trigger financing for the completion of towers 2 and 3 under an agreement with the Port Authority of New York and New Jersey.

“As the economy has gotten stronger, we’ve had a steady stream since [the] first of the year,” Robert Becker, Durst’s senior leasing manager, said of the groups checking out 1 World Trade Center, which is 55 percent leased and scheduled to open next year. “We’re very happy,” he said. “We’re expecting to have a busy 2013.”

Seven of the top 10 Downtown leases so far this year were either relocations from Midtown or Midtown South or expansions by tenants migrating to the market, according to Jones Lang LaSalle. Publisher HarperCollins’s lease on about 180,000 square feet at 195 Broadway and GfK’s deal on 75,000 square feet at 200 Liberty Street were the biggest relocations, while collaborative work space provider WeWork’s 120,000 square feet at 222 Broadway was the largest “new location,” JLL found.

GfK is moving from Chelsea Market, and it considered spaces in Midtown and Midtown South before choosing Brookfield’s complex west of the World Trade Center, said John Wheeler, managing director at JLL, who represented the landlord. Brookfield is in the midst of a $250 million renovation of the complex, lining up restaurants for waterfront space on the Hudson River and changing its name from World Financial Center to Brookfield Place.

Condé Nast, which spurred interest in the Downtown market in 2011 when it agreed to lease more than one million square feet in 1 World Trade Center, is in final negotiations to lease an additional 80,000 square feet at 222 Broadway.

Hurricane concerns have started to fade as prospective tenants take heart from landlords’ investments in infrastructure, such as moving vulnerable electrical systems out of basements and adding flood barriers. With Verizon now switching all of lower Manhattan to fiber from copper, the area will be the “most technically advanced of any market” in New York, said Hal Stein, managing principal of Newmark Grubb Knight Frank.

“Storms come and they go,” said Mr. Silverstein, whose building at 120 Wall Street was among those temporarily put out of service by the storm. “What you do is you learn to protect yourself, protect your building, so when the next storm comes you won’t have any outages. That’s what we expect.”

At the Trade Center, he said, millions of gallons of water flowed into the open pit at the construction site during the storm. “We were able to pump it out and get it going,” he said. Once the site is fully enclosed and construction completed, it will be 15 feet above sea level, he said. “That should be more than enough to cover any eventuality.”
Still, the aftereffects of the storm linger.

Over the past few months, Durst has been re-engineering the mechanical systems and rebuilding retail spaces on Front Street, one block from the East River, which were swamped by seven feet of water. Two of the retail tenants in the 200-year-old buildings are leaving, but Durst is optimistic that the majority of the 13 businesses will return, officials said.

Meanwhile, at 1 New York Plaza, where the office space was reoccupied four weeks after the hurricane, Brookfield is negotiating with new retail tenants for its below-grade space after refurbishing the area and moving electrical systems to the second floor, out of harm’s way. The building also has Brookfield’s only sizable Downtown office vacancy, a 400,000-square-foot space on the upper floors, said David Cheikin, vice president of leasing.

While waterfront landlords’ investments in capital improvements have added to prospective tenants’ “comfort levels,” hurricane concerns are still “a factor in lease negotiations,” said Wes Rudes, senior vice president at Cresa, a real estate tenant advisory firm. The concerns are also likely to come up again when the time comes to renew the leases of companies that were forced out of their offices for as long as three months, he said.

So far, financial firms, traditionally the backbone of the New York office market, are conspicuous in their absence from the current spate of leasing deals.

Of the eight companies currently trawling the Downtown market for offices of a quarter-million square feet or more, none are financial companies, said Robert Constable, executive director of C&W.

Mr. Cheikin said that is likely to change as the financial sector regains confidence in the economy.

“They are the largest occupier of space in the city,” he said. “They’re always going to part of the fabric of New York. I have every confidence they are going to go back into growth mode.”

The leasing activity has driven average rents in the neighborhood up about 8.5 percent from their mid-2010 low, to $40.27 a square foot. That compares with $51.12 in Midtown South and $67.28 in Midtown, according to C&W data. The Downtown vacancy rate has declined to 8 percent, from more than 12 percent in September 2010. The vacancy rate is 6.8 percent in Midtown South and 10.2 percent in Midtown.

The figures don’t count the space that’s about to be added to the Downtown market, including World Trade Center space and offices at Brookfield Place, where Merrill Lynch’s lease will roll over in October. Adding that much space to the current market will bring the vacancy level to as much as 18 percent, Mr. Mazur said. As the state-of-the-art offices at the Trade Center come onto the market, Downtown may well be in the unusual position of having a rising vacancy rate coupled with an increase in average rents, he said.

Landlords are confident that the neighborhood is positioned to thrive in a way that wasn’t possible decades ago, when upwardly mobile professionals aspired to live in Westchester County or Connecticut and would enter the city by way of Grand Central Terminal. Today those workers have shifted their sights to waterfront areas in Brooklyn and New Jersey—and to Tribeca and other growing Downtown neighborhoods. With the opening of the transportation hubs linking about a dozen New York subway and New Jersey PATH trains, Downtown offices will be a short trip from where most workers want to live—and stands to be more attractive to companies seeking office space as a result.

Brokers and landlords say they expect the expanding retail and restaurant offerings at the Trade Center and Brookfield Place to enhance the appeal of the neighborhood.

“We’re changing the whole nature and use of lower Manhattan,” Mr. Cheikin said.

Mr. Silverstein’s 30 Park Place hotel and condominium development is also getting back on track, he said, thanks to rising demand for hotel rooms and rising luxury condo prices. The project is more compelling today than when it was first conceived in 2007, he said, adding that he expects financing to be completed soon and construction to begin this year.

Downtown rents have traditionally trailed those for uptown space by about 30 percent, a gap that could narrow with the opening of the Trade Center towers.

“It’s my belief, certainly at the Trade Center, [that] the Downtown discount is going to close very swiftly; it’s just a question of time,” said Mr. Silverstein, who has endured bureaucratic delays, the financial crisis—and now a hurricane—as he fought to rebuild the World Trade Center after the 9/11 terrorist attack in 2001. “When I look back, I realize where we were, what we had to do to get the process going, and where we are today, [and] I am nothing short of amazed.”

For Stuart Siegel, an executive vice president at CBRE, 547 West 20th Street is a building that has figured prominently in the star broker’s career.

Roughly 12 years ago, he sold the five-story building to new owners while it was still a warehouse space, as much of the remote area along 11th Avenue near Chelsea was at that time. As luck would have it, however, a pair of zoning changes five years later made it possible for the owners to convert the building into residential condominiums with a pair of commercial condos on the ground floor.

Today, those ground-floor spaces are occupied by two art galleries, one leased by Elizabeth Dee, the other by the statistician and professor Edward Tufte, who also dabbles in art. While the former gallery still has several years remaining on its term sheet, Mr. Tufte’s lease is month to month, and as such, Mr. Siegel has been retained by the owners once again to market the 4,773-square-foot gallery space.

After the jump, Mr. Siegel reviews the floor plans with The Commercial Observer and discusses what, exactly, potential tenants can look forward to from the space.

Despite growth in office jobs to 1.26 million in 2013 from 1.21 million in 2006, occupancy levels are down to 89 percent from 93 percent over the same period. Those numbers reflect changes in office environments and working styles that will continue to impact occupancy for the foreseeable future, according to Richard Bernstein, an executive vice chairman at Cassidy Turley, during the firm’s annual State of Real Estate market meeting last week in a presentation entitled “Staying Ahead of the Delta.

“They will write Don Draper out of the show by making him work remotely,” joked Mr. Bernstein, conflating the 1960s era television show Mad Men with recent occupancy trends.

Office and retail sales trended differently in 2012, added Noble Carpenter, head of capital markets at Cassidy Turley. Retail experienced strong growth last year, with investment sales transactions doubling in 2012 across Midtown, Midtown South and Downtown. While the number of office sales increased, the average size of transactions dropped 52 percent in the same markets.

After the jump, a selection of data points from the event.

WHEN SBFI, a vendor of financial and control room furniture, sought to relocate its showroom space, company executives repeatedly found themselves touring a web of buildings associated with Randy Sherman, an executive managing director at Murray Hill Properties who also represents Rose Hill Properties Associates.

But it was a 12-story asset at 461 Park Avenue South that solidified the company’s decision to commit to Midtown South. Despite initial worries about high rent, officials at SBFI, which counts seven of the world’s 10 largest investment banks as clients, were persuaded to move from 701 Seventh Avenue earlier this year. The change of heart, said Mr. Sherman, an executive managing director at Murray Hill Properties who represented the landlord, occurred shortly after SBFI officials were shown a clearer picture of just how tight a market Midtown South had become—yet a newly renovated lobby at the 31st Street building may have clinched the deal.

Mr. Sherman reviewed the plans with The Commercial Observer and discussed what, exactly, drew SBFI to a 4,775-square-foot, 10th-floor office earlier this year after a lease-signing in July.

As we all know and dread, it’s tax season. Between that and the sustained political brouhaha over tax reform and the series of fiscal cliffhangers in Washington, it’s a wonder any of the accountants

But the experts were happy to chime in about a range of accounting matters currently affecting the real estate industry. It’s also not surprising given, each accounting firm’s workload, that the industry is rapidly expanding in New York.

Last year, Deloitte relocated to a 430,000-square-foot office at 30 Rockefeller Plaza while many of the city’s other top firms grew their employee ranks, possibly signaling future land grabs. Below, a breakdown of firms making the biggest moves.

The U.S. already raised the tax rate on qualified dividends to 20 percent, from 15 percent, making REITs more attractive relative to other equity investments. And there’s a possibility of more tax rate adjustments as the government continues to cast around for ways to balance the budget.

“There was a lot of concern about where those rates were going during the discussion of the fiscal cliff,” Mr. Becht said. As it turned out, “it wasn’t a tremendous increase, but the concern is there will be further pressure to increase the tax rate.”

REITs are generally exempt from corporate taxes and pass along dividends that are taxed at the shareholders’ ordinary income tax rates. REITs are required to distribute at least 90 percent of their taxable income in dividends, providing a more reliable yield than other companies, which may cut their payouts.

REITs are “not paying any tax at the corporate level, and, as a result, the shareholder profit isn’t being taxed at the corporate rate,” Mr. Becht said.

The publicly traded trusts may also benefit more from rising property prices than some analysts expect, he said, as more property owners take advantage of an umbrella partnership, or UPREIT, structure that lets them transfer holdings to a REIT and defer recognition of a taxable gain.

Similar to 1031 like-kind exchanges, this structure allows individuals to contribute their ownership in real estate property in exchange for limited partnership units. Years later, they can exchange their partnership units for shares in the publicly traded REIT, which would trigger a taxable event.

In one recent example of the strategy, GTJ REIT Inc., based in Lynbrook, N.Y., entered an agreement in which the general partners transferred ownership of 25 tristate-area properties worth $194 million to an UPREIT subsidiary, which assumed $115 million in outstanding mortgage debt and agreed to refrain from selling the properties for seven years.

“The advantage is you’ve got the ability to defer the tax for years,” Mr. Becht said, adding that he’s seen increasing interest among clients in the structure, which provides “an easier way to quickly grow.”

While low interest rates and rising real estate prices continue to favor REITs, gains may already be priced into the shares, according to Ross Smotrich, an analyst at Barclays Capital, who took a “neutral” view of the industry in a year-end report. He cited cash flow and earnings multiples that were already higher than the average for the past 10 to 15 years.

“We believe that 2013 will prove to be another year for selective stock picking,” Mr. Smotrich wrote. “We do not expect much by way of net asset value growth and, as such, think performance will be driven by earnings growth.”

He recommended industrial property owners such as Prologis Inc. and mall REITs like Simon Property Group Inc. and CBL & Associates Properties Inc.

Apartment owner Essex Property Trust Inc. was his top pick.

Disputes over tenants’ responsibility for repair and improvement costs in addition to their base rent are seldom publicized, since they tend to be settled out of court, but substantial money can be at stake.

“In one instance, I actually recovered $1.9 million for a tenant,” said Thomas Woodward, director of real estate advisory services at Holtz Rubenstein Reminick LLP. “It’s not unusual for me to come up with a million here and a million there.”

The forensic review, in which the landlord’s records are examined in detail, goes beyond what is covered in the typical “desktop audit,” in which expenses are compared with the prior year, Mr. Woodward said.

“The year-over-year percentage increases can look okay, but when you drill down into the detail, you find there are costs that are noncompliant with the lease terms, or capital improvements added to repairs,” he said. “I’m actually zoning in on items that pop out to me that are questionable.”

The audits generally hinge on a determination of what’s allowable under the lease and whether an expense is a capital improvement or a repair. If it’s a repair, the cost generally can be included in expenses paid by the tenant. If it’s a capital item, it’s more likely to be a cost to the landlord.

When a landlord makes a capital improvement that eliminates the need for repair work, such as an elevator modernization, the audit can determine how the costs should be divided. “You don’t want the landlord to be penalized,” Mr. Woodward said. But the tenant should be charged “only for the amount of repair that has been eliminated by doing the capital improvement.”

Over the years, building owners have learned to anticipate the disputes, said Seth Molod, a partner at Berdon LLP who does lease audit work for landlords.

“Most of our landlords are savvy, and write lease clauses in the right way,” Mr. Molod said. “Sometimes there are legitimate gray areas. Those positions can usually be worked out.”

Often, tenants wrongly assume that any large cost must be a capital item, Mr. Molod said. He gave the example of a building with a glass façade where the gaskets holding the windows in place have to be changed. While the gaskets may cost only about $3 each, the repair could add up to $5 million for a large building, because of the labor-intensive nature of the job.

“It’s not a capital item—you just put the window back in place,” Mr. Molod said. Still, “the tenant would try to throw out an argument to disagree with that.”

The disputes are one reason leases have grown more complex in cities like New York, where the buildings are bigger and the expenses higher.

“Generally the leases are getting better as far as detailing things, to avoid disputes going forward,” Mr. Molod said. “It’s a big-city issue. You don’t see a lot of these kinds of clauses in suburban office leases.”

With Cassidy Turley’s help, The Commercial Observer decided to put a spotlight on some of the most dramatic occupancy shifts across Manhattan over the last three years.