The $200 Club: Triple Digit Leasing Activity Shifts into High Gear

WEB_coverilloSome were surprised, to say the least, when news spread last month that Brazil’s Banco Itaú had agreed to pay upward of $200 per square foot for a 35,000-square-foot space on the 50th floor of the General Motors Building at 767 Fifth Avenue.

“I nearly fell off of my chair when I read that,” said one broker, speaking on condition of anonymity. “Most of my banking clients would have a hard time justifying that decision.”

“The foreign banks should know better,” he went on, unleashing a tirade on fiscal responsibility.

Brazil, however, was mostly spared the cataclysmic effects of the European sovereign debt crisis, in the same way that New York City was spared the economic devastation that rolled through the country during the Great Recession. So it makes sense that in the shadow of that enormous deal, amid an emerging air of post-recession optimism, lies a tremendous rebound in triple digit-leasing across Midtown.

As the second quarter of 2013 comes to a close, 28 triple-digit leases have been recorded, according to data from Cushman & Wakefield. Annualized, the number of triple-digit leases soars to approximately 60, the highest number since 2008 and one that would trounce last year’s 35 such deals.

The trend is not a reflection of a tangible boom in the financial sector at large—not yet, anyway. But the increase represents an elite group of small, prestigious boutique financial firms across the city that are perhaps intent on savoring another taste of pre-recession glory, amid a shortage of high-end space.

“These are the Chanels of the real estate community—and it seems clear that there is plenty of demand for the finest fashion that New York has to offer,” said Michael Cohen, tristate president at Colliers International. “There are a growing number of firms that can make decisions that are not based solely on economics. It’s a reflection of ego, importance, personal tastes and desires, and ultimately it reflects that kind of mentality.”

If these firms are the Chanels of the real estate world, then the Guccis of the financial building stock include the General Motors Building at 767 Fifth Avenue, the Seagram Building at 375 Park Avenue and the Bank of America Tower at 1 Bryant Park, each boasting premium spaces on high floors with sweeping city and park views.

The desire for companies to be in such space is to some degree a product of a need to impress clients in a heavily client-dependent business. Buildings catering to these firms also offer premium build-outs and harbor cooling and other infrastructure systems that accommodate the 24/7 equipment and trading systems that many financial firms depend on.

“It has all the infrastructure,” said David Emden, director at Newmark Grubb Knight Frank, after bringing Waterfront Capital Partners and Oak Circle Capital Partners last month to 540 Madison Avenue, where rents stretch above $100 per foot. “High-end financial service guys don’t want to lift a finger building-out space.”

In addition, much of it boils down to the simple desire to feel and look the best, because for the firms that can afford these spaces, the difference between $80 and $120 rents is negligible.

“If a guy making $600 million a year has the opportunity to overlook Central Park in an environment where he feels good and his people feel good, and it’s a $2-million-a-year incremental difference, you’re going to see leases like this,” said Robert Alexander, chairman of CBRE’s tristate region. “And I think you’re going to continue to see leases like this.”

As the economy continues to improve, Mr. Alexander, like many others, is confident that larger firms will begin taking triple-digit space despite the greater financial implications—and potential consequences.

“If I’m representing UBS and I’m looking at 900,000 square feet, at $80 a foot versus $120 a foot, then there are implications that have to be looked at,” he said. “So do I see that we’re going to have an influx of million-square-foot-type users coming in and paying $120 a foot? Probably not. Would I see a 300,000-square-foot tenant paying $120 a foot? Maybe.”

The trend comes at a time in the city’s history when major slices of the commercial arena are once again vying for national, if not global, attention. Trophy towers are being acquired at record pace, the epicenter of lower Manhattan, at 1 World Trade Center, is now the tallest building in the Northern Hemisphere, and turnout at the annual ICSC ReCON convention—which long ago became far more than just a retail convention—was its highest since the boom years.

And overall Midtown leasing is strong. The first five months of the year saw 6.6 million square feet of new leases signed, an increase of 24 percent over last year’s volume and the third-highest leasing volume of the past seven years, according to data from Cushman & Wakefield.

“The high-end market is showing a resurgence, but it doesn’t stand alone—demand in Midtown has picked up,” said Richard Persichetti, vice president of research at Cassidy Turley, adding that 1.5 million square feet of positive absorption was posted in April and May.

At least 65 percent of the triple-digit leases recorded so far are from the financial sector, with an average square footage of just 10,344 square feet, he said. Among recent deals, Ellis Lake Capital took 5,400 square feet at 444 Madison Avenue in April and CVC Capital Partners took 20,000 square feet at 712 Fifth Avenue in February, according to published reports, both with asking rents at or above $100 per square foot.

“High-end tenants have had more confidence within the financial markets,” said Lance Leighton of Studley, who along with Evan Margolin represented LH Financial last month in a 6,553-square-foot, 10-year lease at Boston Properties’ 510 Madison Avenue, also at asking rents of at least $100 per foot.

Developed by Harry Macklowe and targeted toward hedge funds and boutique financial services companies, the brand-new 355,598-square-foot building features an executive fitness center, a lap pool and a 6,500-square-foot garden terrace.

“We looked at the usual suspects for high-end office space in the Plaza District, with a focus on buildings around Central Park,” Mr. Leighton said. “With the improvement of the financial markets, tenants have been less apprehensive to commit to these types of deals.”

Job growth in the financial industry, considered a primary indicator of overall prosperity, has been tepid at best. At 166,500 jobs, the current securities employment level is still 22,000 below the last peak of 189,000 jobs in 2008, and commercial banking has lost jobs so far this year, said Eastern Consolidated chief economist Barbara Byrne Denham.

The stock market, however, has far surpassed bullish investors’ dreams for positive returns so far this year. And many financial services firms are showing more resilience than many would have argued months ago, when the doom and gloom of the European debt crises spread uncertainty through the markets.

“Financial services firms are still the largest occupiers of space in Manhattan,” said Ken McCarthy, chief economist with Cushman & Wakefield. “And if you look back at growth cycles of the past, financial services has always been an important contributor. So, to me, you have to expect that they will come back and there will be growth in the industry.”

In addition, homing in on the high-end office leasing space, the most recent Hedge Fund Report from Jones Lang LaSalle, which tracks the correlation between hedge fund assets under management and Midtown trophy building rents in Midtown, predicts a further pop in rents for high-end space in Manhattan. That could tip more spaces over the triple-digit mark, resulting in an even greater rate of triple-digit deals being signed during the second half of this year.

As assets under management grew by $122 billion in the first quarter of 2013, property owners became more optimistic about the value of trophy space, in part due to the record-setting gains in the Dow and increasing demand, the report noted.

A slew of trophy tower sales accounted for $3.8 billion of the city’s first-quarter dollar volume, creating a 46 percent year-over-year jump, according to data from Avison Young. More recently, two foreign investors bought a 40 percent stake in the General Motors Building, valued at $3.4 billion, Crown Acquisitions and Highgate Holdings paid $1.3 billion for 650 Madison Avenue, and Boston Properties and its partners sold 125 West 55th Street for $470 million.

“If the cost of these types of spaces is rising, it’s going to boil down to supply and demand,” Mr. Cohen said. “There is a very limited supply of this type of trophy space, and New York City is a society of the haves.”

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