Downtown Vacancy Rate Climbs As Inventory Hits Market
Terence Cullen Oct. 2, 2015, 5:57 p.m.
Despite some high-profile relocations Downtown in the third quarter, the submarket’s vacancy rate jumped almost 9 percent from the same time a year earlier, a JLL report provided first to Commercial Observer shows.
The vacancy rate increased 8.5 percent overall to 11.5 percent for the third quarter from 10.6 percent the same time a year earlier. For Class A office space, the rate increase is even greater with a year-over-year jump of 10.7 percent to 12.4 percent. The submarket covers Manhattan south of Canal Street.
A massive 1.8 million square feet coming online at 1 Chase Plaza and 375 Pearl Street, parts of which have been repositioned from data centers to office space, pushed the vacancy rate up despite the signing of high-profile leases, according to John Wheeler, JLL’s Downtown expert.
“That’s a pretty big slug of new inventory,” Mr. Wheeler told CO, adding that leasing activity for the last quarter was still strong. The third quarter of 2014 included Time Inc. and the Hudson’s Bay Company’s deals to relocate to Brookfield Place, which came to a combined 1.1 million square feet. “You can’t get to the point where you’re expecting that to happen every year.”
Technology, advertising, media and information, or TAMI, tenants are also expected to increase their foothold Downtown in the coming months, according to a Newmark Grubb Knight Frank report released exclusively to CO. The Associated Press and News Corp. are both in the process of working out deals at Brookfield Place and 2 World Trade Center, respectively, the NGKF report noted.
The JLL report highlighted, however, that Downtown had seven of the nine big deals in New York City between July and September. That included KCG’s deal to relocate from Jersey City to 168,873 square feet at Brookfield Place and the New York City Department of City Planning’s lease for 115,011 square feet at 120 Broadway. Moody’s Investor Services also announced last month it was taking 75,000 square feet at 1 World Trade Center.
Companies like KCG either coming back to Manhattan from Jersey City or venturing over for the first time should continue in the coming years, Mr. Wheeler said.
“They’re paying more per square foot [Downtown], but they obviously feel that’s a better investment for their business,” he said. “We see a few other tenants in the pipeline…coming back from Jersey to Manhattan, Lower Manhattan specifically.”
Vacancy is not the only thing that’s been going up in the Downtown market. Lower Manhattan rents inched up year-over-year to an average of $56.53 per square foot—a 6.4 percent jump from the third quarter of 2014, when the average rent was $53.12 per square foot, JLL’s data indicate.
The Midtown submarket is enjoying the lowest vacancy rate it has seen in years, though that’s not going to last forever. The vacancy rate dropped almost 8 percent year-over-year, to 9.3 percent for the most recent quarter from 10.1 percent in the third quarter of 2014, according to the JLL report. The massive 120,000-square-foot expansion by LinkedIn at the Empire State Building carried that overall drop.
The NGKF report noted that J. Walter Thompson’s 270,000-square-foot lease at 237 Park Avenue, Pandora’s 103,515-square-foot lease at 125 Park Avenue and the NBA Players Association’s 47,234-square-foot relocation to 1133 Avenue of the Americas from Harlem contributed to the dipping vacancy rate.
Leasing was highest in Midtown amongst finance, insurance and real estate tenants, according to NGKF. Those included private equity firms Harvest Partners, which expanded and renewed at 280 Park Avenue for a total of 40,000 square feet, as well as Medley Capital, which leased 22,000 square feet at the recently renovated building.
The Midtown Class A office space vacancy rate dipped to 9.8 percent in the third quarter—the first time it’s been below 10 percent since September 2008 when the Great Recession reared its ugly head, the JLL report indicates. But a few key pieces will hit the market in the coming months that should bring vacancy up to a higher rate. The space occupied by L’Oreal, which is relocating to 10 Hudson Yards, is hitting the market with 350,000 square feet at 575 Fifth Avenue.
“We expect Midtown vacancy rates to increase in the coming months,” said Tristan Ashby, JLL’s head of New York research, within the report. “Even with the return of strong activity this fall, we are tracking a number of large blocks that will come to market during the next several quarters that could temper or reverse recent gains in occupancy.”