Movin’ On Up
Aside from the power struggles that have characterized the ongoing tussle over the future of the Empire State Building, the string of billion-dollar offers to buy the iconic building all but mirrored the strength and optimism felt among the city’s property owners and investors during the first half of 2013.
Despite some uncertainty at home and abroad, particularly with Mideast turmoil and strife roiling across Syria and Egypt, the Manhattan real estate market has enjoyed a heady year, with low interest rates and a seemingly limitless influx of international capital sparking the demand for trophy properties.
“The only clouds on the horizon include the situation in Syria and the Fed’s scaling back its purchases of bonds, which have raised interest rates a bit,” Barbara Byrne Denham, chief economist at Eastern Consolidated, said. “But this has slowed down price acceleration, and it shouldn’t create too much of a roadblock in the next four months.”
Recent large office building sales reflected an escalating hunger for safe, long-term bets, amid a post-recession environment characterized by lower commercial mortgage delinquencies, higher confidence and streaming lines of credit.
This summer, for example, two foreign investors bought a 40 percent stake in the General Motors Building, valued at $3.4 billion; Crown Acquisitions and Highgate Holdings reached a deal to pay $1.3 billion for 650 Madison Avenue; and Boston Properties and its partners sold 125 West 55th Street.
Meanwhile, owners are confident enough to raise rents, and investment sales are strong amid a wave of development that’s reshaping the city. Rents across the city have risen, in many cases substantially, over the last year, according to the latest data from Cushman & Wakefield.
The firm’s Manhattan Office Market report for August shows year-over-year rent increases across the board, from 2.4 percent in Midtown to 15.2 percent Downtown to a 22.8 percent increase in Midtown South.
“Owners want to maximize revenue, and one clear way to do that is by raising rents,” Ken McCarthy, chief economist with Cushman & Wakefield, said.
At the close of the second quarter, 28 triple-digit leases have been recorded, according to Cushman & Wakefield, which, annualized, marks the highest transaction volume of its kind since 2008, a number that would trounce last year’s 35 such deals. Many of the triple-digit leases, signed among boutique finance and investment firms, demonstrate that the financial industry is perhaps not in as bad of shape as the doom and gloom of the recession may have entailed.
Even larger financial institutions are growing. PNC Bank, for instance, signed a 55,000-square-foot expansion lease at RXR Realty’s 340 Madison Avenue in September, upping the firm’s space from 45,000 to 55,000 square feet across the 10th and 11th floors in the 745,000-square-foot building.
In addition, financial jobs have begun to pick up. The latest data from Eastern Consolidated from July shows that the banking and securities job markets have added almost 10,000 jobs since September 2009.
“If you’re a big office owner, you want to see financial services growing,” Mr. McCarthy said.
Meanwhile, the tech sector continues as a boon for the city, as a range of industries, even those outside of the creative space, have come to prefer the collaborative open spaces with common rooms and common areas.
“We’re spending way more on our build-outs than we were several years ago,” Leslie Himmel of Himmel+Meringoff Properties said. “And we have very little space vacant in our building right now.”
The interiors of buildings may be changing, but new development across the city is changing the face of the city’s exterior, as a handful of developers grow more comfortable with modern designs.
Ms. Himmel pointed to Durst Fetner Residential’s futuristic triangle of a building being developed at West 57th Street. The 711-unit 80/20 residential building will have approximately 45,000 square feet of ground floor retail space, which includes one large unit with 24,500 square feet on 12th Avenue.
“Finally, you have world-class architecture that’s making this city look like a modern city,” Ms. Himmel said.
Meringoff Properties outfitted the retail space at 1114 First Avenue with a window art installation featuring neon squares, a testament to the newfound spark in foot traffic seen along that corridor.
“The attention that we got as a result of that has been outstanding,” Ms. Himmel said. “There seems to be a proliferation of retailers and people who want to spend money all over New York. One would think that maybe retail rents would be going down when you look at the health of online businesses, but rents are skyrocketing.”
As those off the beaten path benefit, the prime corridors across the city have experienced massive rent gains. The Real Estate Board of New York’s spring report showed that year-over-year average asking rents in the Times Square spiked 55 percent to $2,175 per square foot. Rents along the Broadway corridor, between 14th and 23rd Streets in the Flatiron District, jumped 50 percent to $320 per foot. Along Fifth Avenue, between 14th and 23rd Streets, rents increased 37 percent to $413. Along Fifth Avenue, between 49th and 59th Streets, rents increased 11 percent to $3,052 per square foot.
“The retail sector is booming, and rents are increasing dramatically thanks to rapidly expanding chains, an increase in tourism and international retailers looking to open flagships,” David Zar of Zar Property NY, an owner of retail condominiums, said.
Indeed, by 2012, the city had logged another record-breaking year, with 52 million visitors helping to create $55.3 billion in economic impact.
Downtown, where much of Mr. Zar’s business is focused, new developments have given rise to high-end shops like Brookfield Place’s Burberry, Michael Kors and Salvatore Ferragamo stores, now in the mix with kids clothing and home furnishing stores spurred by new residential development, blending with old favorites Century 21 and J&R Music and Computer World–a scenario that couldn’t have been imagined a decade ago.
“Our strategy during the downturn was to sign relatively short-term leases, and luckily it’s going to pay off,” Mr. Zar said. “Now, as the Manhattan market continues to grow, the outrageous prices we saw back in 2011 seem like bargains.”
Downtown is thriving with the completion of 1 World Trade Center and the repositioned Brookfield Place. Hudson Yards on the West Side is set to include more than 6 million square feet of commercial space.
On the investment sales side of the equation, despite a slow start to the year following last year’s unprecedented fourth-quarter sales surge, when capital gains tax changes loomed, experts expect this year to end up on par with last year despite a current 35 percent lag so far.
Massey Knakal recorded nearly $41 million in annual investment sales (properties greater than $500 per square foot) last year, below the more than $62 million seen in 2007, but $13 million more than any year since. The first half of this year topped out at $13.2 million in sales, but not because of any lack in demand.
“Low supply is what has caused the drop-off so far this year,” Massey Knakal Chairman Bob Knakal said. But, he added, “Low supply is a good thing, because it exerts upwards pressure on values.”
And those values have skyrocketed above even the levels seen in the prerecession heyday of the market.
“Just about every property type in every neighborhood is selling for more than it did in the peak of the last cycle,” Mr. Knakal said. “The biggest issues going forward are interest rates and how the mayoral election goes.”
Ms. Himmel and others also voiced concern regarding the upcoming elections, but a general optimism permeates even that discussion.
“We have our work cut out in terms of the next mayor and making sure development and redevelopment potential continues for the city’s developers and owners, helping to reinvest money into New York,” Ms. Himmel said. But, she added, “I’m quite confident that no matter who becomes mayor we will continue to grow.”