TenantWise
Home Search For Space My Tenantwise About TenantWise Contact



Login

Register




Market Analysis

Midtown Major Market Analysis:

42nd Street to 62nd Street
River to River:

First Quarter, 2008 Analysis

The Midtown market consists of commercial office buildings in the following submarkets: Columbus Circle, Plaza District, Times Square, Midtown Eastside, Sixth Avenue, Rockefeller Plaza, Park Avenue, and Grand Central. We divide the buildings in these submarkets into four classes. Class A consists of buildings built after 1969. Class B are buildings built between 1931 and 1969 possessing older infrastructure. Class C buildings are those buildings built prior to 1931 and over 250,000 sq ft in size. Class D buildings are those built prior to 1931 but are less than 250,000 sq ft in size. In some cases in the Midtown market, Class B buildings are of a similar quality to Class A buildings as a few of these buildings have seen extensive cosmetic upgrades and rehabilitations. These buildings have added them to the Class A property count. The inventory of the Midtown market is primarily comprised of Class A properties as shown in the chart below:

Building Class Inventory Sq Ft
(in ‘000s)
% of Total
Inventory
Availability Sq Ft
(in ‘000s)
% Vacancy Avg Asking Rate ($/psf)
A 121,110 63% 8,000 6.6% $93.34
B 35,353 18% 3,675 10.4% $72.92
C 15,126 8% 976 6.5% $64.07
D 21,654 11% 1,662 7.7% $72.37
Total 193,242 100% 14,314 7.4% $83.67

Key takeaways of our first quarter analysis include:

Asking rate growth continued despite economic concerns.  We have now completed two full quarters since the onset of the credit crisis in the third quarter of 2007, and we have yet to see any meaningful downturn in average asking rates. The average asking rate in the Midtown market was $83.67 psf, up $4.83 psf since the end of last quarter and up $6.07 psf since 3Q07. The 1Q08 average asking rate represents 23.1% y/y growth, an acceleration from 20.5% y/y growth in 4Q07. Continued rate increases occurred across all building classes and all submarkets, with the exception of Rockefeller Center (which was essentially flat at $101.19 psf in 1Q08 vs. $101.33 psf in 4Q07). Additionally, while the Plaza and Columbus Circle submarkets saw rate declines in 4Q07, both submarkets saw rates increase in 1Q08 to levels exceeding 3Q07 rates. We see two likely drivers of asking rate strength in the Midtown market. The first is demand support from foreign firms paying for leased space with foreign currencies that are strong against the dollar. The second, and likely more prevalent, driver is landlords’ hesitancy to reduce published asking rates because they do not want to signal weakness to the market. We continue to believe that landlords are lowering net effective rents with increased concessions like free rent and increased work letters in order to attract tenants without lowering published asking rates. While the market will sustain these concessions in the short term, if the market continues to soften and the economy gets worse, eventually tenants will demand lower lease rates.

1Q08 average asking rate results by building class include:
 

  • Class A buildings saw 22.5% y/y asking rate growth to $93.34 psf. This represents a slight slowing in the pace of growth from the last two quarters, but it is still an increase of $3.90 psf over 4Q07’s $89.44 psf.
  • Class B buildings saw 17.1% y/y growth to $72.92 psf. This is also a significant slow down from peak growth in 4Q07 of 32.2%, but it is still a $0.72 psf increase over 4Q07’s $72.20 psf.
  • Class C buildings saw 21.0% y/y growth to $64.07, an acceleration from 19.2% y/y growth last quarter and a $3.79 psf increase over 4Q07’s $60.28.
  • Class D buildings saw 28.8% y/y growth to $72.37 psf, a dramatic acceleration from last quarter’s 12.1% y/y growth and enough to place the Class D rate just short of the average Class B asking rate. The Class D average rate for the quarter represents a $10.89 psf increase over 4Q07’s $61.48 psf rate. The increase was driven by a $20 psf increase on the average asking rate for 627K sq ft of space at the old New York Times building at 229 West 43rd St. Class C and D buildings saw both accelerating growth and rate increases over last quarter. These two property types make up 19% of the total market, and were enough to drive accelerating growth for the Midtown market as a whole.

Vacancy continued to creep up.  Vacancy in Midtown continued to increase for the second straight quarter after hitting a two-year low in 3Q07 at 6.9%. 1Q08 vacancy reached 7.4%, representing a 32 bps increase over 4Q07, though still down 25 bps y/y. The vacancy increase amounted to a 626K sq ft increase in availability, driven by vacancy increases in Class A and B properties. Class A vacancy increased to 6.6% from 4Q07’s 6.1%, representing an increase in availability of 627K sq ft. Class B vacancy increased to 10.4% from 4Q07’s 8.8%, representing a 575K sq ft increase. Offsetting these two building classes was a reduction in Class C vacancy to 6.5% from 4Q’s 10.2%, driving a 531K sq ft reduction in availability. The Class C vacancy reduction is driven primarily by the lease of the entire building at 636 11th Avenue to Ogilvy & Mather Worldwide, a unit of the second largest advertising company WPP Group, resulting in 460K sq of space coming off the market in the quarter (Ogilvy & Mather reportedly leased 533K sq ft, highlighting the re-measurement that occurred at the building during the leasing negotiation). As of 1Q08, Class A properties accounted for 56% of submarket availability, vs. Class B properties, which accounted for only 26%. Some of the biggest contributors to Class A vacancy include:
 
825 Eighth Ave 669K sq ft Available $92.33 psf Avg
1290 Ave of the Americas 402K sq ft Available $N/A
1633 Broadway 361K sq ft Available $92.00 psf Avg
30 Rockefeller Plaza 286K sq ft Available $130.00 psf Avg
805 Third Avenue 279K sq ft Available $59.15 psf Avg
9 West 57th Street 225K sq ft Available $108.33 psf Avg

Not surprisingly, the pattern of vacancy witnessed for the Midtown market is mirrored by 7 out of 8 of its submarkets. Plaza, Grand Central, Columbus Circle, Sixth Avenue, Times Square, Midtown East and Rockefeller Center have all seen increases in vacancy after hitting a low point during the end of last year. All but Rockefeller Center and Times Square hit their vacancy low points in 3Q07 (Rock Center’s lowest vacancy was 9.1% in 2Q07, while Times Square’s lowest was 8.6% in 4Q07). The only submarket in Midtown that continues to show vacancy declines is the Park Avenue submarket, which saw vacancy fall to 4.6% in 1Q08, from 4.7% in 4Q07 and 5.3% in 3Q07. However, we expect vacancy in this submarket will increase as major banks that occupy space on Park Avenue continue to layoff staff as a result of the credit crisis and the weakening economy.

Absorption was down significantly relative to historical levels.  We analyze net absorption (leased space less newly available space) in the submarket as a measure of the relative strength of demand relative to new supply. Net absorption was negative for the Midtown market, resulting in the increased vacancy mentioned above. The 626K sq ft of increased availability was the net impact of 2.0M sq of leased space offset by 2.6M sq ft of newly available space. Major lease deals that occurred during the quarter include Ogilvy & Mather (533K sq ft at 636 11th Ave., AXA Financial (450K sq ft at 1290 Ave of the Americas), MMS USA Holding (350K sq ft at 1675 Broadway) and Gibson, Dunn & Crutcher (222K sq ft at 250 West 55th Street). Properties that contributed most to newly available space include 825 Eighth Ave (669K sq ft), 909 Third Ave (358K sq ft), 1633 Broadway (241K sq ft) and 150 East 42nd Street (118K sq ft).

1Q08 results show a marked slowdown in first quarter activity relative to the last two years, when the first quarters were seasonally active. In 1Q07, 4.0M sq ft was leased, offset by 3.0M sq ft of newly available space, for positive absorption of 987K sq ft. The first quarter of 2006 was even more active, when 7.8M sq ft was leased, offset by 6.9M sq ft of new space for 902K sq ft of positive absorption.

In our view, the significant slowdown in leasing activity, on both the supply and demand sides, in 1Q08 suggests the market was in a holding pattern for much of January and February as market participants waited for some clarity on the direction of the market. By March, activity began to increase once again. 64% of all space leased in the quarter was leased in the month of March. Additionally, 83% of all newly available space brought to market in the quarter was introduced in March. This indicates to us that landlords and prospective tenants have delayed as long as possible, and now transactions are occurring at an increased velocity. This should provide more data and greater insight into the state of the commercial leasing market. However, for the month of March, new supply outpaced demand by 900K sq ft, suggesting the supply and demand dynamics of the Midtown market could be taking a turn in favor of tenants.

 Summary:
 

Total Inventory 193.2M sq ft 781 buildings
Class A (1969-current) 121.1M sq ft 194 buildings
Class B (1931-1969) 35.4M sq ft 154 buildings
Class C
(before 1931>250,000 sq ft)
15.1M sq ft 34 buildings
Class D
(before 1931<250,000 sq ft)
21.7M sq ft 399 buildings

1Q 2008 Asking Rates:

Class A B C D Wtd Avg
Direct $98.60 74.51 64.54 73.11 86.00
Sublease 68.50 56.64 55.97 49.22 65.25
Wtd Avg 93.34 72.92 64.07 72.37 83.67

4Q 2007 Asking Rates vs. 4Q 2007:
 
Class A B C D Wtd Avg
1Q 2008 Wtd Avg $93.34 72.92 64.07 72.37 83.67
4Q 2007 Wtd Avg 89.44 72.20 60.28 61.48 78.84
  3.90 0.72 3.79 10.89 4.83

1Q 2008 Asking Rates vs. 1Q 2007:
 
Class A B C D Wtd Avg
1Q 2008 Wtd Avg $93.34 72.92 64.07 72.37 83.67
1Q 2007 Wtd Avg 76.19 62.28 52.94 56.18 67.97
  17.15 10.64 11.13 16.19 15.70

Completed transactions.  The fifteen largest lease transactions completed in the Midtown market in the first quarter of 2008 are as follows:

 

Address

Tenant

Square Feet
1 636 Eleventh Avenue Ogilvy & Mather 533,184
2 1290 Ave of the Americas AXA Financial 450,000
3 1675 Broadway MMS USA Holdings 350,000
4 250 West 55th Street Gibson, Dunn, & Crutcher 222,000
5 153 East 53rd Street General Motors 135,000
6 340 Madison Avenue SunGard 120,000
7 590 Madison Avenue Cromwell & Moring 100,000
8 1180 Ave of the Americas Scripps Networks 76,801
9 885 Third Avenue Latham & Watkins 70,000
10 205 East 42nd Street Prudential Douglas Elliman 58,524
11 1270 Ave of the Americas Venable LLP 52,000
12 9 West 57th Street Silver Lake Partners 31,800
13 580 Madison Avenue Bonhams & Butterfields 23,400
14 730 Fifth Avenue Kohlberg, Kravis & Roberts 20,700
15 825 Third Avenue Kirby, McInerny & Squire 20,556


 


Charts
 [click to enlarge]

 


Absorption
[click to enlarge]

 


Supporting Market Detail
[click to enlarge]

 
For further information contact:
M. Myers Mermel
Chief Executive Officer
(212) 943-7777
Caroline McLain
Chief Financial Officer
(212) 943-1902

© Copyright 2008, TenantWise.com Incorporated. All Rights Reserved.

Goods & Services     Privacy     Press     Terms of Use