Midtown South’s Tech-Fueled Office Boom Has Ended. What’s Next?
Retail, meanwhile, continues to do OK.
Midtown South’s office and retail markets have returned to Earth.
Not too many years ago, Midtown South was the most happening place in New York City, if not one of the hottest commercial real estate markets nationally. It was the place where the city’s fledgling tech industry wanted to be, a place that helped fuel the ubiquitous property term TAMI — technology, advertising, media and information — to describe its driving office users.
A slice of Midtown South became known as “Silicon Alley,” the East Coast’s answer to the California tech hub. For a few years, until 2002, there was even a billboard reading “DoubleClick Welcomes You to Silicon Alley” at 22nd Street and Broadway.
The area attracted post-college graduates and their iPhones by the thousands, and it seemed the only thing New York needed was more 80-year-old buildings. These arrivals loved the classic structures that other industries had rejected as obsolete and had abandoned in favor of shinier, newer spires in Downtown or Midtown. Nothing symbolized what was going on in Midtown South more than the long lines of people in Madison Square Park waiting each day for hamburgers at the world’s first Shake Shack.
More importantly for office and retail owners — and their brokers and partners — this evolution caused commercial rents to shoot up and vacancies to drop.
Now the section of Manhattan roughly between West 34th and Canal streets — home to such neighborhoods as Chelsea, the Flatiron District, NoHo, SoHo, Koreatown and the Meatpacking District — more resembles the city that surrounds it. New York City’s surging tech tide has ebbed, and so has much of Midtown South’s vibrant energy.
“Looking back, tech was highly attracted to that market,” said Marisha Clinton, senior director of Northeast research for brokerage Savills. “You had players such as Google and LinkedIn. Fast forward to recently, the availability rate for Midtown South is actually up on the quarter and the year-over-year. Looking at the new product — namely 1 Madison Avenue — that pushed up both the availability rate and the overall asking rent figure.”
Other research and observers echo this arc for Midtown South.
“Demand through 2019 had been driven by the tech sector,” said CBRE (CBRE)’s Paul Amrich. “When they pulled back, it slowed by a lot.”
In the third quarter of 2023, Midtown South’s office availability rate was 21.5 percent — higher than the 19.6 percent share for Manhattan overall, according to a Savills report. Office rents average $84.96 a square foot, ahead of Manhattan overall’s $77.54 as well as its traditionally more expensive neighbor to the north, Midtown, which was at $83.74. That last statistic remains a remarkable benchmark for Midtown South and as clear an indicator of its only recently ended rocketship rise.
In a new report on Midtown South by CBRE, the firm put the office vacancy rate — a reading of space that’s actually vacant, as opposed to availability, which measures space both empty and that will become empty, generally within around 12 months — at 17.9 percent. The average asking rent was $81.73. It described the third quarter as “lack-luster” with leasing of 814,000 square feet, below the five-year quarterly average of a little over 1 million square feet. And that was with leasing improving by 12 percent over the prior quarter.
“The tech sector, Midtown South’s pre-pandemic catalyst, remained weak, which kept leasing subdued,” CBRE researchers wrote.
Past victories, especially through TAMI, appear to be sustaining the market — for now.
“Midtown South is holding its own,” Paul Pariser wrote in an email. Pariser, along with longtime partner Charles Bendit and their company Taconic Partners, pushed 111 Eighth Avenue, a vast warehouse that once served Manhattan’s shipping industry, toward a building that would attract tech entrepreneurs. And that it did: Google has owned 111 Eighth since 2010. “It still remains a vibrant ecosystem where many young and innovative firms wish to locate and young people wish to live. [But] it is not immune to economic and social forces adversely affecting all cities in the U.S.,” Pariser wrote.
Both a pullback in venture capital funding for tech firms and the rise of hybrid work have hurt the market, Savills’ Clinton said. The rise in interest rates since early 2022 may have also had a negative effect. The same with layoffs at tech firms. Layoffs.fyi, a site that popped up to track just that, counts more than 224,000 lost tech jobs nationally in 2023 alone.
One of the things that will set the continued tone for Midtown South is whatever happens to 11 Madison Avenue, an Art Deco skyscraper built in the 1930s and originally called the Metropolitan Life North Building.
Ironically, the tone will hinge not on a tech company’s fate at 11 Madison but on that of a financial services firm. 11 Madison had been the New York home of the global investment bank Credit Suisse, which leased 1.1 million square feet there. In June, UBS Group AG acquired its troubled competitor. The future of the building — which one prominent investment sales broker once called the General Motors Building of Midtown South — is still unclear.
Clinton said she doesn’t see things going back to the way they were in Midtown South. Tech startups tend to be very cost-conscious, and they go wherever they can find affordable rent, whether that is Midtown, Downtown or Midtown South. Contrary to its image, there’s been quite a bit of new construction in Midtown South, so old classic buildings are not quite the dominant architecture they had once been. That puts the market in position to take advantage of whatever “flight to quality” there may be, Clinton said.
“We have a good number of trophy, higher-end buildings in Midtown South, where occupiers have been taking up higher-
quality space,” she said, naming SL Green Realty’s revamped 1 Madison Avenue and RAL Development’s Zero Irving among them.
Corporations, whether tech-related or otherwise, are still trying to get their heads around the idea of returning to the office: who will, who won’t and who can’t, as well as how many days some might come in. In the case of some older buildings that haven’t received an upgrade, “The owners may have to consider ‘What else I can do with this building?’” Clinton said.
Retail’s fate might be clearer. Midtown South’s SoHo led Manhattan’s submarkets with 16 third-quarter deals, the only neighborhood to have leasing volume in the double digits, according to CBRE. The firm reported that 107,962 square feet of retail space was leased in that submarket, the only one to record a six-figure leasing total. (CBRE’s definition of SoHo includes NoHo and extends into the Lower East Side.) Second was Midtown’s Grand Central area with 47,034 square feet leased.
“It depends on the street,” said Richard Hodos, JLL (JLL) vice chairman for retail brokerage, citing Flatiron and SoHo as submarkets that have been “robust” in his words. In those markets “the reason for that is that the rents for Manhattan are in a range that [retailers] find acceptable. Basically the sweet spot is between $250 and $350 a square foot on a ground floor. And the stores are in the right size range.”
On the other hand, there’s the Meatpacking District, the onetime manufacturing area that became ultra-chic at the very end of the last century, where retail availability approached 27 percent in JLL’s second-quarter report.
“I think Midtown South is one of the bright spots in the city,” Hodos said. Like the Upper East Side, the Upper West Side, Broadway, Columbus and Third Avenue “there was a lot of availability two, three years ago, and they’re gradually getting leased.”