For First Time in Recent History, Class B Availability Lower Than Class A


A flight to value is occurring in the Manhattan office market as Class B office product remains in high demand.

At 10.6 percent, the current availability rate for Class B space is 170 basis points less than the Class A rate of 12.3 percent. This is the only real estate cycle in recent history in which Class B availability rates have been lower than those for Class A. This trend started in 2012 and has continued for the last 10 months.

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170BasisPointsThere are three major factors contributing to this trend: the $20-per-square-foot spread between Class A and Class B pricing ($70.56 and $50.05 per square foot, respectively), demand coming from the TAMI (tech, advertising, media and information services) sector, which is focused on the predominantly Class B Midtown South market, and tenants in Midtown looking to save on real estate expenses by moving to more cost-efficient space.

There has always been a wide spread between Class A and Class B pricing, and that spread is actually narrowing due to TAMI’s demand for Class B space. As the Class B market tightens, expect the pricing gap to narrow further with average Class B asking rents reaching historically high levels.

If demand for Class A space in Midtown remains stagnant throughout 2013, a price correction for the high-end spaces could occur, and at the very least landlords will likely increase concession packages to make their once-heralded space more attractive.

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