The $200 Club: Triple Digit Leasing Activity Shifts into High Gear
By Al Barbarino June 18, 2013 8:00 am
reprints“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.”
