As the World Turns: Leasing Activity Impact Markets First, Then Owners
Jotham Sederstrom Sept. 19, 2012, 7 a.m.
As a pair of 26-foot steel beams were hoisted high above Manhattan on April 30, the crowd below spoke of resilience, hope and remembrance.
One World Trade Center had just hit a height of 1,271 feet, making it the city’s tallest building. Port Authority Executive Director Pat Foye said in a press conference that the building will “anchor Lower Manhattan and its rebirth for many generations to come.”
But tourists and tristate residents aren’t the only ones noticing the change in the city skyline. A number of commercial property owners are looking to the tower and other developments as a hopeful bellwether for the future, despite what most analysts still describe as a stagnant market.
The numbers speak for themselves. Real estate brokers leased 12.9 million square feet through July 31, 2012, a 28 percent drop from the 17.9 million square feet inked during the same period in 2011, according to a CBRE report. Vacancy sat at 7.5 percent, no change from a year earlier.
Even so, there’s a big thanks to be given to Midtown South, which has ridden the tech and media boom in the area to the lowest vacancy rate of all U.S. central business districts in the second quarter of 2012, according to CBRE. The vacancy rate in the area, which spans roughly from 34th Street to Canal Street, was 4.8 percent through July 31, compared with 6.9 percent at the same time last year. Leasing activity is hot too, with 3.27 million square feet leased so far in 2012, compared with 2.99 million square feet the previous year.
Needless to say, there’s a lot riding on the 2.6 million square feet expected to be unleashed onto the market when 1 WTC is opened in 2014 by The Durst Organization and the Port Authority of New York and New Jersey. Larry Silerstein’s 4 World Trade Center, with its 1 million square feet of space, and Edward Minskoff’s 51 Astor Place, with its 400,000 square feet, are just a few of the high-profile towers slated for ribbon-cuttings in the next few years, as more and more property owners are hoping their gamble on Downtown Manhattan pays off.
“Midtown South is a hot market for media and tech firms, with the lowest vacancy in the country, which will lead to spillover in other markets,” said Brookfield Office Properties Chief Executive Dennis Friedrich, who operates seven buildings with 12.8 million square feet downtown. “Given the pricing disparity that still exists between Midtown and Downtown, we believe that Downtown is likely to be the greatest beneficiary of this spillover effect.”
The vacancy rate in the Downtown market has continued to drop since the third quarter of 2011, when it was 9.9 percent, according to a report from Cushman & Wakefield. It currently sits at 8.9 percent. Asking rents have decreased slightly to $40.06 per square foot from $40.18 per square foot last quarter, according to the report, and the influx of even more space may push tenants farther downtown.
“Historically, Midtown was the location that companies flocked to for affordable rent following a recession, but that’s not the case this time,” said Ken McCarthy, senior economist and senior managing director at Cushman & Wakefield, in a recent market report. “Instead, we’ve seen companies look for space in the Midtown South submarket, and it’s so tight there that tenants are looking at neighboring Downtown and lower Midtown, such as the Garment District.”
No company fits that description better than media conglomerate Condé Nast, which will leave its Times Square digs behind for 1 million square feet as the anchor tenant in 1 WTC in 2015. Marketing and advertising research company Nielsen is also in talks to lease 160,000 square feet in MetLife’s 85 Broad Street tower, moving away from its Vornado Realty Trust-owned building at 770 Broadway, according to the Wall Street Journal.
“Tenants are going farther afield to satisfy their space requirements,” said Steven Durels, director of leasing and real property at SL Green, during a July 27 conference call. “That may mean a tenant who is on Fifth Avenue, who you normally thought was going to stay in another two- or three-block radius of the current space, is now opening it up and saying, ‘I’ll go to Midtown South because I just like the lifestyle,’ or ‘I’ll go farther west because I’m chasing a lower rate.’”
But perhaps the two factors that will dictate where big tenants will decide to locate themselves will hinge on this: asking rents in Midtown are up more than four dollars compared with last year, $64.46 per square foot in July 2012 compared with $60.18 per square foot in July 2011, despite the fact that the vacancy rate actually increased 0.5 percentage points, from 7.7 percent to 8.2 percent, according to data from CBRE.
The other key: Midtown South only has seven available blocks of space greater than 100,000 square feet, down by more than half since 2009, according to Cushman & Wakefield.
“The thing that Downtown can do that Midtown can’t, is that the Downtown market can lease very large blocks of space and accommodate that size,” said Andrew Levin, senior vice president of leasing at Boston Properties, which operates eight properties in Manhattan totalling more than 8.6 million square feet.
Still, Mr. Levin said, the draw for companies to move into Midtown has not declined, and leasing velocity and pricing are both stable in the neighborhood.
“Midtown Manhattan for Class A office space is a fixed-supply market,” he said. “If we’re at stable levels, then we’re doing well.”
Boston Properties is set to boost that market when it opens the 1.1-million-square-foot tower known as 250 West 55th Street in 2014. Law firm Morrison Foerster has signed up for space at the building, and reportedly law firm Kaye Scholar will take space there as well.
“Every 10 to 15 years, the market needs that introduction of new stock, of new property for companies to move and expand into,” said Dave Cheikin, vice president of leasing at Brookfield Properties. “The benefit of the New York City economy is that it’s diversified enough that if it flips around, it can still be steady.”
Another steady aspect for the real estate market has been concessions, with most property owners seeing little change.
“Concessions have been pretty flat,” Boston Properties’ Levin said of the Midtown market, mentioning that there’s typically been 6 to 10 months of free rent, and TIs between $50 and $60 per square foot.
“It really depends on the size of the tenant you’re talking about,” said Mr. Durels. “If it’s a small tenant, call it 10,000 square feet or less, you’ve got to deliver the space built, which is why you’re not seeing us stop the pre-build program.”
Perhaps one of the most important changes on the horizon has to do with the upcoming presidential election, as some owners suggested that policy changes and a more optimistic view of the world economy could boost leasing activity.
“It feels like tenants are hesitant to make long-term lease commitments until there is more clarity about the future,” said Nicholas C. Bienstock, managing partner of Savanna. “The uncertainties about the upcoming federal election, how government regulation will affect financial institutions and their business models, the continued deterioration in Europe and potential slowdown in Asia make it difficult for companies to feel optimistic about growth.”
For a lot of potential tenants, the leasing environment right now is at a stable place that could set up 2013 quite well.
“I think a lot of people are getting their thoughts together for the end of 2013,” said Fred Posniak, senior vice president at W&H Properties, which operates a portfolio that includes the Empire State Building and 1 Grand Central Place. “Summer is often a planning stage,” he said, adding that while leasing has been slow, his company has had a very busy summer in terms of touring, which gives him hope for the rest of the year.
“You’re seeing a broader geographic search by a lot of tenants, and that’s what’s adding a different twist to the competitive landscapes,” Mr. Durels said.
Whether the favored landscape in 2013 turns out to be Downtown, the West Side, Midtown South or other perennial favorites, the only thing certain is that every property owner will be looking up, looking for the next glimpse of hope for the future of commercial real estate.
- Patrick Foye
- Dennis Friedrich
- Nicholas Bienstock
- Ken McCarthy
- Steven Durels
- 85 Broad Street
- brookfield office properties
- Vornado Realty Trust
- Larry Silverstein
- Boston Properties
- Conde Nast
- SL Green Realty Corp.
- Durst Organization
- 1 World Trade Center
- Port Authority of New York & New Jersey