Through the first two months of 2017, the Midtown South vacancy rate jumped 50 basis points to 7.1 percent and is up 100 basis points from one year ago. It also marks the highest level attained in 24 months. The sudden uptick in vacancy is mostly due to three buildings adding significant available space to the market—330 Hudson Street, 1250 Broadway and 148 Lafayette Street. But this is much-needed space, as Midtown South still has the lowest vacancy rate of any major office market in the U.S. and only has eight blocks of space greater than 100,000 square feet available. In addition, leasing activity is off to a slow start, with only 932,022 square feet of new leases completed, 5.1 percent behind 2016’s pace.
Pricing remains at historical highs, as overall average asking rents are up 1.2 percent from one year ago at $70.79 per square foot. Of the five Midtown South submarkets, four had year-over-year asking rental increases:
Greenwich/Noho: Up 14.4 percent to $73.93 PSF
Chelsea: Up 7.7 percent to $63.56 PSF
Soho: Up 5.8 percent to $75.43 PSF
Hudson Square/West Village: Up 1.4 percent to $78.07 PSF
Madison/Union Square was the only submarket that had a year-over-year decline in asking rents, down 1.8 percent to $68.74 per square foot.
With strong demand in Midtown South but limited available supply, starting rents had a steeper year-over-year increase and were up 6.1 percent to $70.06 per square foot at year-end 2016. Midtown South starting rents are just 1 percent off the asking rental average—a slight difference compared to Midtown where starting rents are 3 percent off the asking rent. Midtown South average net effective rents jumped in 2016 as well, up 9.5 percent to $62.01 per square foot. Despite the increase in Midtown South net effective rents, concession packages tightened, as the gap between starting rents and net effective rents narrowed in 2016 to 13 percent—compared to the previous two years when the gap average was 16.8 percent.
Regardless of a rising vacancy, Midtown South remains the hottest market in town.
Richard Persichetti is the vice president of research and marketing at Cushman & Wakefield.