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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 ‘000s) |
% of Total
Inventory |
Availability Sq Ft
(in ‘000s) |
% 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 South’s 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 1Q08’s rate is still up y/y, it is down
$10.19 psf from the peak 3Q07 rate and down $4.69 psf from 4Q07’s $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 3Q07’s $54.00 psf rate. 1Q08’s rate
is roughly flat to 4Q07’s $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 4Q07’s
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 quarter’s 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 4Q07’s 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 4Q07’s 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 4Q07’s
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 4Q07’s 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
year’s results, 1Q08 results suggest slowing demand with an increase in the
pace of new supply. It remains to be seen how long the market’s 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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