The Big Squeeze: How Technology Start-Ups Found Midtown South, and What Happens When the Bubble Bursts

If Don Draper still ran an advertising agency, he’d have a very different Manhattan life. Instead of a dozen martinis and oysters at Grand Central every night after work, it’d probably be a quick Peroni and antipasti at Eataly before hitting the gym.

He might even be home early enough to kiss Betty and read a book to his kids. And, of course, he’d work in a fabulous open-plan office in Manhattan’s most desired commercial real estate market, Midtown South.

midtown south for web The Big Squeeze: How Technology Start Ups Found Midtown South, and What Happens When the Bubble Bursts

Midtown South.

Indeed, advertising agencies like Grey Global Group, anxious to prove that they’re as hip and young as their creative rivals, now have headquarters at addresses like 200 Fifth Avenue. Account execs jostle for lunch tables around the Flatiron, Hudson Square, Soho and Chelsea, with Silicon Alley Wunderkinder, models, publishers and, of course, the Google guys.

“This isn’t your father’s New York City, where people commute in from Westchester,” said Gregg Weisser, executive managing director of leasing at the Moinian Group, which owns several properties in the area. “Midtown South is the hottest market in the country right now.”

Workers in Midtown South are blessed with some of the best facilities in the office market. They can go for drinks after work at Manhattan’s hottest bars, head to dinner at any one of the new restaurants opening by the day, and then walk home to their apartments, which are increasingly in the same neighborhood they work.

“It’s really a 24/7 micro market where everything is available all the time,” said Mr. Weisser. “It’s a live/work/play environment. People want a 24-hour atmosphere.”

Midtown South ended the first quarter of 2012 with a 5.9 percent vacancy rate, down 2.1 percent from a year earlier. The area is filling offices faster than any other market in New York, and some brokers argue it’s now the tightest market in the country.

Although the $1.9 billion purchase of 111 Eighth Avenue by Google in 2010 didn’t start the trend, it certainly increased the district’s gravitational pull—and it continues to drive demand for more offices.

As the hungry search-engine giant, which has promised to hire even more New Yorkers over the coming year, gobbles up more and more space in the building, it has been pushing other smaller tech firms out, sending them searching for other cool office space in the area, Cushman & Wakefield senior economist Ken McCarthy said.

Smaller tech firms are also competing with the big guys. Facebook, IBM and Amazon have all been spotted this year checking out office space in the area. Microsoft was reportedly unable to find an office in Midtown South big enough for its needs.

Average rent has jumped from $45.50 to nearly $46 during the last quarter of 2011, according to Cushman & Wakefield data. Rents in the area’s Class A buildings were up to nearly $70 per square foot last year.
Manhattan on average saw a 3 percent spike in rental prices in 2011, but in places like Chelsea, Hudson Square and the Madison/Union Square areas, costs bounced nearly 20 percent.

Thankfully, said Mr. Weisser, the inventory of Midtown South suits the industries moving in there.

“They take up less space,” said Mr. Weisser. “Knowledge workers are often telecommuters—working from home or on the road.”

But there are, of course, exceptions.

Brit publisher Pearson snatched up 270,000 square feet in at 330 Hudson Street, thanks in part to some sweet tax breaks from the city. In exchange for bringing its roughly 600 employees working in Westchester and New Jersey offices to Manhattan, the city offered the publishing house $9 million in tax credits and $4.5 million in energy cost savings.

“The Hudson Square area is precisely the type of vibrant, stimulating center for media, education and digital services for businesses like ours,” said Will Ethridge, CEO of Pearson North America.

Boston-based Beacon Capital Partners signed a 99-year lease on the building from Trinity Real Estate last year, agreeing to sink $113 million into renovations of the 440,000-square-foot building. Trinity bowed out of a similar lease with TriBeCa Partners in 2011 after three years when its renovation plan stalled.

The Pearson deal in September topped off a busy leasing year for the district.

“In the past year, more than 400,000 square feet of space in Hudson Square was leased by creative businesses that came to the district to be close to peers in the industry,” said Ellen Baer, president of the Hudson Square Connection Business Improvement District. Pearson wasn’t the only British firm to move into the area.

Everyone’s favorite U.K. tabloid, The Daily Mail, settled into a cozy 5,200-square-foot space at 42-44 Green Street last year.

The paper’s online American division moved into the five-story cast-iron building, recently renovated by Zar Property Management, in March.

Like many owners of the area’s aging inventory, the property owner upgraded its properties last year, said David Zar, a principal at the family-run real estate business.

But while it may sound like landing office space on Olympus is easier than signing a lease in Midtown South, there remain some dead areas. For example, 550 Washington Street has been sitting half empty—nearly half a million square feet—since 2005. The cobblestone streets that line this West Chelsea building haven’t been enough to draw businesses, which may continue to avoid an area that hasn’t quite had the development of restaurants and facilities that other Midtown South submarkets have.

The Flatiron district, with Eataly, Shake Shack and a plethora of restaurants opening on Park Avenue South, is now the heart of the trendiest office market, mostly because of tech, said James Buslik, principal at Adams & Co., LLC, which owns four million square feet of office space below 42nd Street.

“The tech sector seems to me to be the hottest growth sector,” he said. Those tenants have gravitated toward a circle that I would put the Flatiron district at the center of.”

Being in the Midtown South market is part of keeping competitive in the creative industry, Mr. Buslik said.

“There is a competition for employees,” he said. “Are you going to want to work Downtown or are you going to work where it’s cool and hip?”

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