Midtown South: Hitting the Ceiling
Billy Gray Oct. 22, 2013, 11:24 a.m.
“I’ll be honest with you,” Gregg Weisser said. “It caught me by surprise.”
Mr. Weisser, the senior vice president and director of commercial real estate at the Moinian Group, was discussing the dramatic rise of Midtown South as a real estate, tech, media and fashion powerhouse. But he likens the fast-paced big-city success story to a leisurely drive upstate.
“It’s like when you’re up in the country, driving in your car with your wife,” Mr. Weisser said. “It’s the middle of October. All of a sudden the trees are yellow and red and—holy shit!—it’s fall! It’s like 10 minutes ago, you were swimming in the Atlantic, and you turn around to autumn. No one can figure out what the hell happened.”
Returning to Midtown South, a confederacy of disparate neighborhoods that he defines as 31st Street south to Canal Street from river to river, Mr. Weisser said, “It was always there. But it wasn’t until there was some critical mass achieved that it took off. I don’t want to say it was Google at 111 Eighth Avenue [that started the boom]; it was before that.”
Whether the current Midtown South gold rush began with the dot-com Silicon Alley days or L&L Holding Company’s 2007 purchase and subsequent turnaround of 200 Fifth Avenue or Google’s 2010 acquisition of 111 Eighth Avenue, the submarket has arguably been this decade’s defining New York real estate fairy tale. But as rents for top-notch properties in the district approach Midtown levels, some real estate professionals admit the ceiling has been reached and that the sort of tenants that turned the area around are seeking affordable shelter elsewhere.
At the moment, time is on the submarket’s side. Various third-quarter reports had Midtown South making different sorts of history. Cushman & Wakefield noted that average asking rents ($60.34 per square foot) in the submarket exceeded $60 for the first time on record. Richard Persichetti, the vice president of research, marketing and consulting at Cassidy Turley, said that average asking rents for Class B properties alone passed that benchmark for the first time. Overall, Cassidy Turley reported that asking rents rose $3.60 in the third quarter, to $62.92 per square foot.
Perhaps most impressively, Mr. Persichetti’s analysis found that just over 35 percent of Midtown South buildings were fully leased, easily dwarfing the figure in Midtown (23 percent) and lower Manhattan (25 percent). Of course, the area between 34th and Canal Streets is low-lying compared to its skyscraping bookends, but the submarket remained tight. Still, Cassidy Turley did find a very slight uptick—of 40 basis points, to 8.7 percent—in availability throughout Midtown South last quarter. A certain East Village building’s addition of 363,000 feet to the marketplace is largely to thank for that.
“A lot of it had to do with 51 Astor Place,” Mr. Persichetti said. “All that space hitting the market kept absorption slightly negative. I don’t think there’s a reverse trend going. There won’t be a slew of vacancies.”
Colliers’s contribution to the third-quarter literature noted a slight decrease in Midtown South availability, to 9.1 percent from 9.2 percent. Midtown and lower Manhattan had more significant declines but considerably more vacant space to begin with. Meanwhile, asking rents climbed a modest 3 percent in Midtown South compared to a 4.9 rise in Midtown.
Despite the somewhat leisurely climb, Andy Roos, vice chairman of Colliers, thinks “Midtown South continues to be red-hot.” He cites limited supply as one reason for the area’s enduring popularity. “While they’ve been adding inventory downtown and on the West Side, in recent years the Midtown South stock has decreased because of conversions. Having said that, it has matured into a 24/7 live-work-play environment.”
Midtown South is also increasingly symbiotic, with the tech, media and fashion tenants woven together in a relatively young and stylish area that suits all three industries. “If you look at digital companies,” Mr. Roos said, “they have distribution. Then look at media: They have content. Content needs distribution, and distribution needs content. And fashion needs both.”
Despite skyrocketing rents, Midtown South is still perceived as a hip alternative to its northern and southern neighbors. Part of that has to do with the conversions Mr. Roos described that deliver open, funky loft-like offices to start-ups and production companies who’ve dispensed with perimeter offices. At these firms, hierarchy isn’t determined by office size, and pool tables are in higher demand than corner offices.
Demographical shifts also aid Midtown South’s ascent. As postgraduates and young families eschew the suburbs for Brooklyn and Hoboken, they’re less tethered to a Metro-North schedule and a building within easy reach of Grand Central.
“Now, the truth of the matter is you can lease in [the] Grand Central [district] for less than Midtown South,” Mr. Roos said “It’s because there’s a cool factor and a desire to recruit and retain.”
As for the prospect of Midtown South cooling off, real estate brokers who focus on the area conceded that dramatic rent gains and airtight inventory cannot last forever. Indeed, the bump in availability described by Cassidy Turley wasn’t the only less-than-rosy figure to emerge from the spate of third quarter data. Edward Minskoff’s high-profile newcomer, again, had a lot to do with the mixed news.
“Prior to 51 Astor being added to the slate, Class A asking rents had already stabilized,” Mr. Persichetti said. “They peaked at a $69 per square foot or so average in April and May. Then the number dropped to $67 the following three months. What happened was once you had 51 Astor—with an average of $90 a foot—it drove the number up to $75. It’s a shame that one big block is changing the average rent.”
More ominously, CBRE reported that leasing activity last month saw a 5 percent decline from Midtown South’s five-year monthly average of 340,000 square feet. Leasing activity through quarter three of 2013 dropped 22 percent from year-ago levels.
Furthermore, a recent report from Ashkán Zandieh of ABS Partners Real Estate, a firm based in the submarket, revealed a slight dip in average asking rents for direct leases between 1,000 and 5,000 square feet. That number dropped to $49.73 from $49.88 between the second and first quarters, hardly cause for panic but a sobering statistic given Midtown South’s robust record. Sublease average asking rents, on the other hand, jumped nearly 6 percent from year-ago levels.
However minor these blips, real estate experts mostly agreed that Midtown South was just about at its apex. “I don’t see Class A prices continuing to skyrocket,” Mr. Persichetti said. Mr. Roos concurred, saying that his “visceral reaction is that once you get into the $60s per square foot range in rents, that’s a very full number. I think for the time being that we’re not at the summit, but we’re getting very close.”
“Stabilization is showing its face right now,” Mr. Zandieh said.
In an interview earlier this year with The Commercial Observer, David Levinson of L&L Holding Company described Midtown South as a “steam valve for an overheated Midtown.” L&L was front and center at the submarket’s hot streak, in particular with 200 Fifth Avenue, the Flatiron District darling whose success buildings throughout the submarket aspire to mimic.
Now, the so-called Times Square South neighborhood, the Financial District and parts of Brooklyn are welcoming some of Midtown South’s overflow. The CBRE data included a 22 percent increase in year-to-year leasing activity downtown through the third quarter versus Midtown South’s 22 percent decline. Granted, there’s more space to absorb in Lower Manhattan. But the movement of media titans like Condé Nast and HarperCollins, smaller firms like Rock Shrimp Productions and the scrappy WeWork to the Financial District has some people talking about a paradigm shift.
The Commercial Observer’s Al Barbarino recently noted that 94 tenants have moved south of Canal Street since January 2012, thanks in large part to Class A average rents of $53 per foot that are $22 cheaper (according to Cassidy Turley data) than in Midtown South. Those rents have not soared, but certainly a good number of companies have been priced out of Midtown South and settled in areas slightly north, south and across the river.
Yet even the brokers who acknowledged a saturation point in the submarket dismissed the idea of an exodus. “There are lots of start-ups,” Mr. Roos said. “The mature ones will want to be in the hot areas where they can find the space. I think the Financial District and Brooklyn offer great opportunities for them.”
Mr. Persichetti thinks that “every tenant has its own situation. Some just want to be in the 23rd Street corridor. Others don’t necessarily have to go with the rest of the flock. And their decision is purely based on what they can afford.”
However obvious the reasons for a Financial District, Garment District or Brooklyn office hunt, logistics still intrude on fledgling tenants looking for a perch. “The Financial District is traditionally the last to rise and first to fall,” Mr. Roos said. “The black hole [in that neighborhood] is the ’60s steel and glass towers, which are commodity products. They’re not terribly cool.”
Speaking of debatable coolness, the maybe-comeback kid Yahoo is one major tech firm that passed on a Midtown South foothold with a 220,000-square-foot lease at The New York Times’s old headquarters on West 43rd Street earlier this year. Meanwhile, the upstart Web fashion platform Refinery 29 recently decamped from Cooper Square to 225 Broadway, nearby frumpy City Hall. Then again, one of the year’s biggest leases was AppNexus’s 220,000-square-foot deal at 28-40 West 23rd Street, in which asking rents approached $60 per foot.
Hammering home the idea that some Midtown South properties are so popular that no one goes there anymore, Google is reportedly close to inking a 360,000-square-foot lease at 85 10th Avenue following unsuccessful attempts to expand at its own jam-packed 111 Eighth Avenue.
Despite the continued heat, Midtown South is unlikely to approach the triple-digit asking rents that are prime Midtown’s exclusive domain.
“Stuff like that is a phenomenon,” Mr. Zandieh said. “It’s anomalous. And it’s not within this submarket.” Touching on the area’s foundational appeal to younger tenants as an alternative to its starchy northern neighbor, he said, “If you think about it for a second, from a logistics standpoint, Midtown South should not outpace Midtown even if it could.”