By Wayne Van Aken
vice president, Cassidy Turley
In the world of commercial real estate, 2012 has thus far been the year of Midtown South.
Within New York City, Midtown South has lead the way in terms of leasing strength and sheer market buzz; on a national basis, the submarket reigns as the tightest in the United States.
As a tenant advisor specializing in Midtown South office leasing, knowing the aforementioned information and every data point that goes with it is my job.
But for my Midtown South clients and prospective clients, many with lease expirations in 2013 and 2014; current and past market statistics are secondary to insight into what will become of Midtown South over the next 12-24 months.
Specifically, what will rental rates look like?
The answer to that question can greatly impact a tenant’s decision to renew a lease, relocate to another area building or even consider moving to a Midtown or Downtown address.
Before looking ahead, let’s begin by reviewing the state of the market today.
As of the end of July, Midtown South Class A average asking rents stood at $61.75 per square foot, with Class B average asking rents at $47.14 per square foot. These rates are respectively 4.6 percent and 8.2 percent below the all-time highs for each building class, which were achieved in 2008.
With even the most conservative analyst estimates projecting 8.0 percent growth in Midtown South asking rents over the next 12 months, it is safe to assume that Class A and B asking rents will have surpassed their existing all-time highs by this time next year. The record highs, both achieved in 2008, are $64.69 per square foot for Class A and $51.38 per square foot for Class B. From there the question becomes “How high will these rents go during this real estate cycle?”
For Class A properties (20 percent of the market in Midtown South), moving much past that $65.00 per square foot mark may prove a challenge as there has not been sufficient evidence to date that vacancy levels justify sustained rental growth at this price point.
In 2008, vacancy was below 6.0 percent for 12 months before rents reached the $60.00 per square foot level. Compare that to today’s market in which, asking rents surpassed $60.00 per square foot earlier this year despite the vacancy rate remaining above 8.0 percent.
With falling vacancy rates likely to taper off, the market momentum currently pushing asking rents will fade, as will rents.
Among Class B buildings, which make up 50 percent of the Midtown South market, the correlation between a decrease in vacancy rates and an increase in asking rents has taken a much more traditional route, which should bode well for the long-term trajectory of rents.
For nearly the past three years, vacancy rates in Class B buildings have decreased or been flat every quarter, which is remarkably consistent.
Considering that rents really only began to rise 18 months ago, and the ascent has been slow and steady, the growth of Class B rents should continue well into 2013, if not beyond. By that time, average asking rents may be in the range of $53.00 – $55.00 per square foot.
Looking forward, all of the vacancy rates and asking rents point to a consistent and strong Midtown South with room for growth.
The consistency will continue to act as a market attribute and stabilizing factor for many clients that are considering lease renewals.