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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 |
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