Stat of the Week: $4.34

MidtownPremiumMidtown South has narrowed the gap with Midtown Class A average asking rents, resulting in the closest historical averages between the two markets. At $80.17 per square foot, Midtown South Class A asking rents are an average of $3.57 less than the $83.74 per square foot for Midtown Class A. Although Midtown South can still be a value play when compared to many buildings within Midtown, that value can be deceiving once operating expenses are calculated. Traditionally, landlords in Midtown South charge an annual percentage increase in lieu of a direct operating pass-through. At current Midtown South pricing, this annual increase exceeds actual operating increases, causing a 10-year lease in Midtown South to be more expensive than one in Midtown.

SEE ALSO: Stat of the Week: 2017 Midyear Report

Over a 10-year lease term, the average operating expense pass-through for Midtown Class A properties is $2.40 per square foot per year. Paired with a market $5-per-square-foot rent bump in the sixth year, this brings the Midtown Class A rental cost to an average of $88.21 per square foot. In Midtown South, a 3-percent annual increase adds an average of $10.31 per square foot per year over that same 10-year lease term. Paired again with the $5-per-square-foot rent bump, this increases the Midtown South rental cost to an average of $92.55. Over a 10-year lease term, the savings of $3.57 per square foot that Midtown South seemed to offer just became a $4.34-per-square-foot premium over Midtown.

Hypothetically, a tenant considering a relocation of their 10,000-square-foot office from an $80-per-square-foot building in Midtown to a $75-per-square-foot building in Midtown South would be faced with a higher real estate expense. Over a 10-year term, that tenant would pay an average of $84.47 per square foot per year in Midtown with a direct operating pass-through. In Midtown South with a 3-percent annual increase, the tenant would end up with an average rent of $86.72 per square foot over the same 10-year term. This $2.25-per-square-foot difference would cost the tenant an additional $225,000 over the term of the lease.