By Al Barbarino
The celebrated rise of Midtown South has some real estate firms asking whether it has reached a plateau, hitting such heights that sections of the city once deemed expensive are being viewed as relative bargains.
In the third quarter of 2012, Midtown South retained a four percent office vacancy rate for the second consecutive quarter, down from 4.7 percent a year ago, according to a report from Colliers.
Sections of the Chelsea and Flatiron/Madison Square Park submarkets are drawing asking rents more than $70 psf, causing many tenants to consider relocating to Grand Central, Downtown, or even Brooklyn markets, the report states.
“Midtown South has emerged as such a leasing juggernaut that some areas of Midtown North are now seen as relative bargains by comparison,” the report states. “Bidding wars for Midtown South office space have become the norm, with Midtown North landlords again trying to finalize deals where they can, becoming more flexible both with lease terms and concessions, especially for digital, media, and information technology tenants who may be frozen out of Midtown South.”
Joseph Harbert, president of Colliers International’s Eastern Region, added, “The demand for Midtown South office space, particularly from technology companies, continues to surge, with little space available for immediate occupancy. Substantial amounts of new building stock becoming available is years in the future.”
The overall Manhattan office market was stable in the third quarter of 2012, as data from the Office of Management and Budget indicating consistent job gains (10,000 jobs per month since February) failed to translate into significant office market absorption. New leases over 10,000 s/f fell from 3.6 million square feet to 3.4 msf. Renewal activity of 1 msf paled in comparison to last quarter’s 5.9 msf, a figure that was boosted by Viacom’s 1.6 msf and Morgan Stanley’s lease for 1.2 msf, according to the Avison Young report.
Manhattan asking rents increased a modest 2.5 percent in during the first nine months of 2012, according to the report. Rents were up for both Midtown and Downtown class A properties, ending the quarter at $70.92 psf and $45.81 psf, respectively. Midtown South’s class A average asking rents finished the third quarter at $68.15 psf.
Firms agree that Midtown South will tighten further, as companies look beyond the tech hotspot for comparable space in Midtown neighborhoods they once found themselves priced out of; Midtown, especially the Grand Central and Times Square South submarkets.
“As the technology sector continues to thrive in New York City, evolving into a significant long-term driver of market activity, we anticipate these firms will look to the Midtown market, where their peers and, particularly, venture capital partners, are located,” said Greg Kraut, Avison Young principal and managing director of the company’s New York City office.
A Cushman & Wakefield report placed the total Midtown South vacancy rate for commercial real estate at 6.6 percent, up from 6.1 percent last quarter, but the firm echoed the idea that, “Since Midtown South is a space-constrained market, tenants are looking at space in neighboring lower Midtown and Downtown.” “Consistent leasing velocity combined with an inventory of available high-quality options are keeping Downtown at equilibrium,” said Andrew Peretz, a Cushman & Wakefield Executive Vice President.
Downtown was the only Manhattan submarket logging year-over-year vacancy rate decreases, down 0.6 percentage points to 9.3 percent, with class A asking rents totaling $45.19 psf, not far off the Avison Young number.
Despite overall modest office leasing gains, reports acknowledged the city’s continued strength compared to many U.S. Cities.
The Collier’s report cited an “improving and diversified employment sector… with an uptick in legal services activity and continued strength in the business services, communications, and media sectors,” the latter being Midtown South — and the city’s — latest driving force.
“New York City continues to outperform most other U.S. cities, but some sectors are softening,” said Ken McCarthy, senior economist and senior managing director at Cushman & Wakefield.
“The cities that are heavy with technology and energy in the employment base have recovered the most jobs.”