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Report: Weakening demand tempers rents as market tilts in tenants favor

A lack of demand and a growing amount of quality space is putting a lid on office leasing prices in Midtown and Downtown, forcing landlords to offer generous concessions and lease terms in a bid to net more tenants.

In New York City’s core class A submarkets last year, total rent increased by just 1.7 percent to $52.97 p/s/f in the Downtown market, while rising only 0.5 percent to $84.34 p/s/f in Midtown, according to a just-released report by Savills Studley.

The Savills Studley Effective Rent Index (SERI) tracked the total rent –which includes the sum of net rent, operating expenses, real estate taxes and electricity – in 2015 in NYC. The analysis also found that landlords kept concessions at near-record levels, and the value of concession packages increased slightly to $102 psf Downtown, a number nearly even with its record peak set in 2011 ($104).

Midtown
Midtown concession packages have reached a new record.

In Midtown, concession packages increased by 0.4 percent to a new record value of $138.50 psf. Tenant improvement allowances in Midtown routinely average just over $70 psf with free rent periods of approximately 10 months, according to the report.

“We are witnessing the early and tentative stages of transition from a landlord’s market to a tenant’s market, particularly in Midtown,” said Keith DeCoster, director of U.S. Analytics at Savills Studley, in a press release.

KEITH DeCOSTER
KEITH DeCOSTER

“Rents are always sticky and what is true of one building doesn’t necessarily hold true for the next one — but with little indication that demand is going to intensify in the short-term and availability rising — conditions are likely to tilt a bit more in tenants’ favor in the coming quarters.”

Decoster added that he sees the changes continuing to be gradual in the future, granted the market doesn’t experience any big shocks.

“Absent such an event, the adjustment in the market will continue to be gradual and far from transparent,” he said. “The shift will show up in negotiated terms such as concessions and options that provide tenants with more flexibility before it is clearly reflected in base rents.”

1WTC
1 WTC

Looking more closely at the numbers, the Downtown market’s total rent registered its weakest increase since 2011. However, effective rent on signed leases could increase slightly in 2016, because much of the available class A space remaining Downtown is priced in the mid $50’s or higher on upper floors at 1WTC and 28 Liberty.

On the leasing side, Downtown’s class A leasing activity decreased to 2.4 million s/f last year, a drop from 4.5 million s/f in 2014.  That drop can be attributed to neighborhood rivalry, according to Steve Coutts, svp of national research services at Savills Studley.

Coutts said in the report that demand for full-floor premium space in FiDi was strong, but activity lagged after Hudson Yards and the Far West Side picked up many of the larger leases, like Wells Fargo and private equity firm KKR’s deals at 30 Hudson Yards, as well as Boston Consulting Group’s 193,295 s/f deal at 10 Hudson Yards.

In Midtown, though Hudson Yards snatched up a slew of leases, class A leasing activity had mixed results last year, totaling 10.3 million s/f, down from 12.6 million s/f in 2014. Tenants paid an average initial year tenant effective rent of $65.23, a 0.6 percent increase from the $64.87 paid in 2014, according to the report. Landlord effective rent dropped by 1.8 percent from $31.67 to $31.12.

“Even the Plaza District, which had been registering steady demand early in 2015, saw a drop-off in demand late in the year as turbulence in equity markets took its toll,” said Coutts in the report. “Class A available space in Midtown increased by more than one million s/f year-on-year, and is expected to increase over the course of 2016 with even sharper growth in 2017 and 2018.”

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