The Heart of Manhattan: Why Midtown is Starting to Make Sense, Again
Jotham Sederstrom April 17, 2012, 8 a.m.
Midtown is starting to matter again.
At least that’s the view to take from commercial real estate deals like Japanese financial firm Nomura Holding’s $60-per-square-foot, 20-year lease for a plush 47-story headquarters at 825 Eighth Avenue.
The arrival of a Japanese multinational at the Worldwide Plaza property embodies the roller-coaster ride of the Midtown office market over the past five years. It was bought by Harry Macklowe for $1.7 billion in 2007, only to be sold at a 60 percent discount two years later in a fire sale that saw George Comfort & Sons snatch it up for $600 million in 2009 when the building was half vacant.
The vacancy rate would only get worse over the ensuing two years. That was until Nomura, which had previously been located at 2 World Financial Center, decided last year it wanted to raise its profile on the American stage—and needed a Midtown address to do so.
While the firm’s Downtown landlord, Brookfield Properties, heavily courted the international financial giant, insiders say that it was the Midtown address that won Nomura’s management over. Cushman & Wakefield’s top leasing broker, John Cefaly, led the negotiation to gobble up 900,000 square feet in the Midtown building, taking the Worldwide Plaza’s occupancy rate past 90 percent for the first time since the slump.
While Midtown still has a long way to go to get back to where it was, brokers say the Nomura deal proves premiere firms are beginning to move on from the recession and are finally willing to pay higher rents for the luxury of an address in New York’s most exclusive commercial neighborhood.
“Midtown has always led Manhattan because location, location, location,” says Robert Sammons, director of research at Cassidy Turley, who believes that strong employment growth continues to drive better occupancy rates across the city.
Midtown’s recovery, however, still lags that of Downtown and the neighboring Midtown South. The Midtown vacancy rate ended the first quarter of 2012 at just under 10 percent, down 0.4 percent from the year before, in comparison to 2.1 percent and 1.3 percent drops in Midtown South and Downtown respectively.
That said, available space dropped more than 4.2 percent in the past year as Midtown brokers inked over 19 million square feet of office space.
Midtown rents improved too, starting off in the low $50-per-square-foot range at the end of 2010, but creeping up to nearly $60 in the middle of 2011, before settling back to $56, on average. The Grand Central submarket had the most growth, with rents jumping from $53 to $57, or 7.4 percent. Top-tier properties in that submarket finished 2011 at an average of $64 per square foot, an 11 percent increase over the year before. And the trend appears to be continuing into this year. Already the average rent has ticked up to $66.32 for prime office space.
Rents may be staying high in the Grand Central area, but it was Murray Hill, which is considered part of Midtown’s commercial real estate market, that led the district’s recovery. Murray Hill’s vacancy rate dropped by more than 4 percent in 2011, due in part to the Asian import-export giant Li & Fung’s 15-year lease in the Empire State Building.
The 490,000-square-foot deal was nearly a year in the making and was finalized in January 2011 with the help of William Cohen and Ryan Kass of Newmark Knight Frank, who represented the building. Cushman & Wakefield repped Li & Fung, getting them in at about $45 per square foot in a deal that was sweetened by environmentally friendly improvements to the aging Empire State Building. The 80-year-old building completed $550 million of renovations that will allow it to reduce its carbon emissions by 105,000 metric tons over the next 15 years and reduce the amount of energy it uses by $4.4 million.
The expansion race among New York City hospitals also helped Midtown lift its occupancy rate. A 21-year lease for 180,500 square feet at 1 Park Avenue by NYU Langone Medical Center for office and clinic space doubled the university’s presence in the building to 367,584 square feet.
“One Park Avenue remained the top choice for NYU Langone Medical Center,” said Cushman & Wakefield chairman of global brokerage Bruce Mosler, who left open the door for the university to take even more space in the coming years.
“The building is strategically located within walking distance of the medical center’s main campus and, with allowances for future expansion rights, will become a core asset for NYU Langone,” said Mr. Mosler.
The diversification of city’s industries after the financial crisis has helped kept Midtown’s office market alive in lean times with tech and media companies absorbing some of the vacancies left by failing financial firms.
But everybody knows that Midtown will need its money men to survive. One glimmer of hope came in the form of Blackstone Group, which took 600,000 square feet off the market last April at 229 West 43rd Street, the old New York Times Building. The $160 million purchase of the top 12 floors worked out at roughly $276 per square foot.
The deal was one of only a handful in Times Square, which continues to cause brokers heartburn.
“The one submarket I really worry about is Times Square,” said Cassidy & Turley’s Mr. Sammons. “It makes me a little nervous.”
Viacom’s lease at 1515 Broadway expires soon, which has Mr. Sammons thinking it might be time for the entertainment company to think about leaving its home, where Broadway crosses Seventh Avenue at the busiest intersection in America.
“I can’t help but think they might look elsewhere because of how crazy it is at the bow tie,” he said.
The new 1.1-million-square-foot office tower at 11 Time Square is also struggling to find tenants. Completed in the summer of 2011, the 40-story building landed white-shoe law firm Proskauer Rose for 406,000 square feet in 2010, but has struggled since then to find big tenants.
The National Basketball Association reportedly took a look at the property and passed.
In December, SJP Properties, looking to expand its field of possible tenants, filed paperwork with the city to convert some of the property to condos.
Mr. Sammons believes that the largest, most prestigious firms that used to dot Times Square have become reluctant to subject their office workers to the hordes of tourists and overpriced food.
“I think it makes a high-end tenant kind of nervous,” Mr. Sammons said.
- Grand Central
- Newmark Knight Frank
- 825 Eighth Avenue
- SJP Properties
- Harry Macklowe
- Blackstone Group
- 1515 Broadway
- NYU Langone Medical Center
- 1 Park Avenue
- William Cohen
- Cushman & Wakefield
- National Basketball Association
- Ryan Kass
- Proskauer Rose
- 229 West 43rd Street
- Brookfield Properties
- Worldwide Plaza
- 2 World Financial Center
- George Comfort & Sons
- Cassidy Turley
- 11 Times Square
- Robert Sammons
- Empire State Building
- John Cefaly
- Li & Fung
- Bruce Mosler