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Market Analysis

Midtown South Major Market Analysis:

Canal Street to 42nd Street
River to River:

First Quarter, 2008 Analysis

The Midtown South market is composed of the following submarkets: Port Authority/Penn Station/Garment, Murray Hill, Chelsea, Flatiron/Gramercy Park, Greenwich Village/SoHo, East Village, and Union Square. 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. The inventory of the Midtown South market is primarily comprised of Class D buildings as demonstrated in the table below:

At the end of the first quarter the market consisted of 11.9M sq ft of Class A space (8% of inventory), 25.5M sq ft of Class B space (16% of inventory), 45.5M sq ft of Class C space (28% of inventory) and 77.1M sq ft of Class D space (48% of inventory).

Building Class Inventory Sq Ft
(in Ď000s)
% of Total
Inventory
Availability Sq Ft
(in Ď000s)
% Vacancy Avg Asking Rate ($/psf)
A 11,938 8% 885 7.4% $87.35
B 25,459 16% 1,788 7.0% $55.86
C 45,481 28% 2,885 6.3% $53.68
D 77,121 48% 2,719 3.5% $51.62
Total 159,999 100% 8,277 5.2% $57.07

Key takeaways from our review of the quarter include:

Midtown Southís average asking rate reached a record high despite economic concerns.  Like the Midtown and Downtown markets, Midtown South continues to see an increase in the average asking rate despite fears that a slowing economy will drive increased vacancy. The Midtown South average asking rate increased to $57.07 psf, up 14.7% y/y and an increase of $0.78 psf over 4Q07 results. Driving the increase was strength in the Class C and D asking rates, offset by decreases in the Class A rate. The average Class A rate was down to $87.35 psf, from a 3Q07 peak of $97.54, though this is largely related to above average asking rate space getting leased up at 1095 Ave of the Americas and the new New York Times building at 620 Eighth Avenue. As this space has leased, high rate space has come off the market and out of the calculation of the average asking rate. Class C and D rate growth outweighed the impact of declining Class A rates because these two building classes accounted for 68% of available space. Class A space accounted for only 11%, while Class B properties, which accounted for 22%, saw 1Q asking rates about flat to 4Q07 levels.

An analysis of the submarkets that make up the Midtown South market show that five of the seven submarkets are seeing continued asking rate increases. All but the Union Square and Port Authority submarkets saw asking rates reach record highs in 1Q08. The decline in the Port Authority rate is related to the lease up of the same two high rate properties mentioned above; 1095 Ave of the Americas and 620 Eighth Avenue.

1Q08 average asking rate results by building class include:
 

  • Class A buildings saw 5.1% y/y asking rate growth to $87.35 psf. This represents a slowdown from peak growth of 20.4% in 3Q07, which is also when Class A properties saw their peak rate of $97.54 psf. While 1Q08ís rate is still up y/y, it is down $10.19 psf from the peak 3Q07 rate and down $4.69 psf from 4Q07ís $92.03 psf rate.
  • Class B buildings saw 14.2% y/y growth to $55.86 psf, a deceleration from peak growth of 30.9% y/y in 3Q07, but still up slightly from 3Q07ís $54.00 psf rate. 1Q08ís rate is roughly flat to 4Q07ís $55.85 psf.
  • Class C and D buildings both saw rate growth in excess of 30% y/y, driving record asking rates for both of these classes in the Midtown South market and more than offsetting the negative impact of reductions in the Class A asking rate. The Class C rate grew 33.0% y/y to $53.68, an increase of $1.87 psf over 4Q07ís rate. The Class D rate grew 31.9% y/y to $51.62 psf, an increase of $4.59 psf over 4Q07.

Vacancy rates were roughly flat over the last four quarters.  Vacancy in the Midtown South submarket was 5.2% in the quarter, roughly flat to the last three quarters. The quarterís vacancy was the result of vacancy declines in Class A, B and C properties, offset by an increase in Class D vacancy.

1Q08 vacancy results by building class include:
 

  • Class A vacancy fell to 7.4%, down from 4Q07ís 8.4% and down 209 bps y/y. This vacancy reduction amounted to a 114K sq ft reduction in Class A availability, to 885K sq ft at the end of the quarter.
  • Class B vacancy was also down, though only slightly. Class B vacancy of 7.0% was down from 4Q07ís 7.1%, representing a 24K sq ft reduction in Class B availability to 1.79M sq ft. This 1Q08 result of 7.0% was also up almost 2% from record low vacancy in 1Q07 of just 5.1%.
  • Class C vacancy saw a significant reduction in the quarter, to 6.3% from 4Q07ís 7.1%, representing a 340K sq ft reduction in Class C availability. The 1Q result for Class C properties represents a 53 bps y/y vacancy increase.
  • Offsetting vacancy decreases in the other three building classes was an increase in Class D vacancy to 3.5% from 4Q07ís 2.9%. This increase represented a 510K sq ft increase in Class D availability, resulting in flat vacancy for the market as a whole.

From a submarket perspective, vacancy was down in the first quarter for four of the seven submarkets. Submarkets that saw vacancy decreases were Union Square, Port Authority, Murray Hill and Chelsea, while the East Village, Flatiron/Gramercy and Greenwich/Soho all saw vacancy increases relative to 4Q07 results. It is worth noting that all submarkets but Murray Hill are up from prior vacancy lows at some point during 2007. The net impact of this on the market as a whole is that Midtown South vacancy was up to 5.2% in 1Q08 from its 1Q07 low of 4.5%. Despite this increase, we believe vacancy increases in this market will likely lag those of Midtown and Downtown due to the lower occurrence of spaced leased by financial services firms, which are often the first in Manhattan to see layoffs during market downturns.

Net absorption had little impact on vacancy, but showed an increase in market activity in March.  Net absorption for the Midtown market was negative 33K sq ft, as 2.23M sq ft of leased space was offset by 2.26M sq ft of newly available space. Since these results were so nearly offsetting, they had almost no impact on total vacancy, resulting in 1Q08 vacancy which was essentially flat to 4Q07.

1Q08 results show a shift in supply and demand dynamics for the market relative to first quarter results in prior years. In the first quarter of last year, 3.8M sq ft of space was leased, offset by 0.4M sq ft of newly available space, for positive absorption of 3.4M sq ft. Relative to last yearís results, 1Q08 results suggest slowing demand with an increase in the pace of new supply. It remains to be seen how long the marketís rates will continue to show resilience to decreases if these market dynamics persist.

Much like the Midtown market, most of the market activity in Midtown South occurred in March. 81% of all leased space and 88% of all newly available space was recorded in the final month of the quarter. In our view, this indicates market participants were delaying long-term real estate decisions for as long as possible while waiting for some clarity on the direction of the market. However, the increased activity should provide more visibility into the state of the commercial leasing market. However, for the month of March, new supply outpaced demand by 850K sq ft, suggesting the supply and demand dynamics of the market could be taking a turn for the worse.

 Summary:
 

Total Inventory 160.0 MM sq ft 1510 buildings
Class A (1969-current) 11.9 MM sq ft 34 buildings
Class B (1931-1969) 25.5 MM sq ft 102 buildings
Class C
(before 1931>250,000 sq ft)
45.5 MM sq ft 109 buildings
Class D
(before 1931<250,000 sq ft)
77.1 MM sq ft 1265 buildings

1Q 2008 Asking Rates:

Class A B C D Wtd Avg
Direct $101.57 58.23 55.00 51.94 57.75
Sublease 71.54 44.74 46.21 47.87 52.87
Wtd Avg 87.35 55.86 53.68 51.62 57.07

1Q 2008 Asking Rates vs. 4Q 2007:
 
Class A B C D Wtd Avg
1Q 2008 Wtd Avg $87.35 55.86 53.68 51.62 57.07
4Q 2007 Wtd Avg 92.03 55.85 51.81 47.03 56.29
  (4.68) 0.01 1.87 4.59 0.78

1Q 2008 Asking Rates vs. 1Q 2007:
 
Class A B C D Wtd Avg
1Q 2008 Wtd Avg $87.35 55.86 53.68 51.62 57.07
1Q 2007 Wtd Avg 83.10 48.91 40.36 39.13 49.77
  4.25 6.95 13.32 12.49 7.30

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

 

Address

Submarket

Tenant Square Feet
1 333 West 34th Street Pt. Authority/Penn Plz/Garm Segal Company 156,000
2 1095 Ave of the Americas Pt. Authority/Penn Plz/Garm Centerline Capital Group 99,552
3 260 Madison Avenue Murray Hill Solomon-Page Group 51,000
4 28 West 23rd Street Flatiron/Gramercy Converse 46,400
5 162 Fifth Avenue Flatiron/Gramercy The CementWorks 35,682
6 11 West 19th Street Union Square Tory Burch 35,324
7 229 West 28th Street Chelsea Rodgers & Hammerstein 25,000
8 1400 Broadway Pt. Authority/Penn Plz/Garm Castle Hill Apparel 20,354
9 350 Fifth Avenue Murray Hill Funaro & Co. 20,008
10 111 Fifth Avenue Union Square Eileen Fisher 19,000
11 16 East 34th Street Murray Hill Staples 16,980
12 315 Park Avenue South Flatiron/Gramercy Phoenix Partners 16,400
13 435 Hudson Street Greenwich/Soho New York Review of Books 15,049
14 525 Seventh Avenue Pt. Authority/Penn Plz/Garm Polo Ralph Lauren 13,756
15 130 Fifth Avenue Union Square Worth Global Style Network 13,300


 


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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