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Downtown Major Market Analysis:
Battery to Canal Street
River to River: Second Quarter, 2008
Analysis
Lower Manhattan consists of the following submarkets:
Hudson Square, City Hall, World Trade/Battery Park, Financial District, and
Insurance District. Prior to 9/11/01, the inventory of Lower Manhattan was
predominately Class B and Class C space. However, Class A inventory has
grown since then, reaching 39% (45.0M sq ft) of total submarket inventory as
of 2Q08. The market as a whole totals 114.4M sq ft of office space.
Residential conversion, as well as demolition and development of new
buildings in and around Ground Zero, are all starting to change the mix of
inventory in the market.
| Building Class |
Inventory Sq Ft
(in ‘000s) |
% of Total
Vacancy |
Availability Sq Ft
(in ‘000s) |
% Vacancy |
Avg Asking Rate ($/psf) |
| A |
44,976 |
39% |
2,084 |
4.6% |
$63.90 |
| B |
25,815 |
23% |
1,479 |
5.7% |
$49.05 |
| C |
29,365 |
26% |
3,809 |
13.0% |
$50.30 |
| D |
14,239 |
12% |
702 |
4.9% |
$42.64 |
| Total |
114,395 |
100% |
8,075 |
7.1% |
$52.91 |
Key takeaways of our second quarter analysis
include: Asking rate growth continued at
an accelerating pace. The Downtown market saw
record growth in its average asking rate of 21.6% y/y, to $52.91 psf at
quarter end. The quarter’s result represented an acceleration from 16.2% y/y
growth last quarter, and an increase of $2.18 psf over last quarter’s
average asking rate. The quarter’s continued acceleration in rate growth
represents the ninth straight quarter of growth acceleration, from a low of
just 1.0% in 2Q06. Over the same time period, the asking rate has increased
$13.15 psf from $39.76 psf. Also of note, this is the first quarter since
2001 with rate growth for the Downtown market that surpassed that of the
Midtown market.
The primary driver of y/y growth was Class C properties, which have growth
26.3% y/y to $50.30 psf. This growth represented a $10.47 psf increase in
the Class C rate over the last 12 months, and accounted for $5.58 of the
total market asking rate increase. Class B rate growth was also a
significant driver, though to a lesser extent, with 20.2% y/y to $49.05 psf,
an acceleration from 13.4% y/y growth last quarter. Class A rate growth
amounted to an $8.90 psf increase in the Class A rate over the last 12
months, and contributed $3.87 to the total market rate increase. We continue
to believe market asking rates are artificially high as landlords continue
to maintain high published asking rates, but lower the net effective lease
rates by offering greater rent concessions like free rent and work letters.
This trend is likely lending support to the current record lease rate levels
we are witnessing across Manhattan. Additionally, the Downtown market
continues to offer an attractive discount to Midtown space for price
conscious tenants. In 2Q08, the discount to Midtown space offered by
Downtown space remained at 39%, up from 36% in 1Q07.
From a submarket perspective, all five submarkets saw an increase in the
2Q08 average asking rate relative to last quarter. However, the most
significant increases were in the Financial District and Hudson Square
submarkets, which saw $4.24 psf and $5.71 psf increases over last quarter
respectively. The Financial District finished the quarter with an average
asking rate of $52.64 psf (up 21.6% y/y) while the Hudson Square submarket
finished with an average asking rate of $50.87 psf (up 29.1% y/y). The City
Hall submarket also saw a meaningful asking rate increase of $3.08 psf to
$47.55 psf (up 6.9% y/y), though this submarket accounts for only 1.1% of
total market availability, so the impact of this increase on the total
market was minimal.
Results for the Downtown market by building class include:
- Class A buildings
saw asking rate growth of 16.2% y/y to $63.90 psf, up $1.02 psf from 1Q08
and representing a slight deceleration from 17.9% y/y growth last quarter.
- Class B buildings saw
asking rate growth of 20.2% y/y to $49.05 psf, up $0.27 psf from 1Q08 and
representing an acceleration from 13.4% y/y growth last quarter.
- Class C buildings saw
asking rate growth of 26.3% y/y to $50.30 psf, up $2.13 psf from 1Q08 and
representing an acceleration from 22.2% y/y growth last quarter.
- Class D buildings saw
asking rate growth of 10.2% y/y to $42.64 psf, up $0.48 psf from 1Q08 and
representing a deceleration from 14.5% y/y growth last quarter.
Vacancy increased slightly from last quarter’s
record low, though likely continued to exclude shadow space. Downtown
vacancy increased slightly to 7.1% in the quarter, up 18.2 bps over last
quarter, but still down 233 bps y/y. The increase in vacancy represented a
fairly minor increase over last quarter’s record low for the market and the
y/y decrease suggests this quarter’s level is still low relative to
historical levels. It is also worth noting that this is only the second
quarter that Downtown vacancy is not the highest of the three major
Manhattan markets. Downtown vacancy continues to exceed Midtown South
vacancy of only 4.6%, but is still less than Midtown’s 7.6%. However, we
continue to believe Downtown’s vacancy likely excludes “shadow space” from
financial services firms with unused space in the wake of recent layoffs
over the last two quarters. Large public firms that account for their office
leases as capital leases are often reluctant to market available space as
FASB 13 and related technical rulings require a balance sheet write-off of
the value of these spaces at the time the firms “cease to use” the space. As
a result, the market is often unaware of these vacancies until the space is
publicly marketed or a new lease on the space is publicly reported.
The 18.2 bps vacancy increase in the quarter represented a 208K sq ft
increase in availability driven primarily by a 473K sq ft increase in Class
A availability. The increase was offset by a 185K sq ft decrease in Class B
availability and smaller 32K sq ft and 48K sq ft declines in Class C and D
availability respectively. The primary driver of the increase in Class A
availability was the net 581K sq ft increase in sublease availability at 77
Water St, driven by Goldman Sach’s decision to sublease 517K sq ft of its
space at the property. The investment bank will no longer need this space
once it moves to its new headquarters next year. The 185K sq ft decrease in
Class B availability was spread across several properties, with no single
property accounted for a significant majority. The decline was also spread
across sublease and direct availability, with direct space accounting for
47K sq ft of the reduction and sublease space accounting for 138K sq ft. The
reduction in sublease availability reduced the proportion of Class B
availability attributable to sublease space to 6.9%, down from 14.4% last
quarter. Class B sublease space is currently offered at a 25.2% discount to
direct space, so the reduction in sublease availability was a further driver
of Class B rate growth in the quarter.
Market vacancy results by
building class include:
- Class A
vacancy increased to 4.6%, up 105 bps from last quarter, but down 85 bps
y/y. This reduction represented a 473K sq ft increase in availability
from last quarter, to 2.1M sq ft.
- Class B
vacancy fell to 5.7%, down 72 bps from last quarter and down 508 bps
y/y. This reduction represented a 185K sq ft reduction in availability
from last quarter, to 1.5M sq ft.
- Class C
vacancy decreased slightly to 13.0%, down 11 bps from last quarter and
down 369 bps y/y. This reduction represented a 32K sq ft reduction in
availability from last quarter, to 3.8M sq ft. Class C vacancy continues
to be impacted by high vacancy at 205 West St (95.6% vacancy), 40 Worth
St (64% vacancy), 330 Hudson St (67.2% vacancy), 205 Hudson St (60.6%
vacancy) and 200 Hudson St (69.2% vacancy).
- Class D
vacancy decreased to 4.9%, down 48 bps from last quarter, but up 78 bps
y/y. This reduction represented only a 48K sq ft reduction in Class D
availability from last quarter, to 702K sq ft. Class D availability
represented only 9% of total market availability at quarter end, so this
decrease was not a substantial driver of the total market vacancy change
in the quarter.
Market absorption was negative in the quarter,
and down significantly y/y as vacancy continued at near record lows.
We analyze net absorption (leased space less newly available space) in the
market as a measure of the relative strength of demand relative to new
supply. Net absorption for the Downtown market in the quarter was negative
208K sq ft, resulting in the increase in market vacancy of the same size
mentioned above. Absorption in the second quarter of negative 208K sq ft was
the result of 2.9M sq ft of leased space offset by 3.1M sq ft of newly
available space. While net absorption was roughly equivalent to the 167K sq
ft of negative absorption witnessed in 2Q07, it is worth noting that market
activity was up significantly on both the supply and demand side in 2Q08.
Leased space of 2.9M sq ft was up 102% y/y, while newly available space of
3.1M sq ft was up 94% y/y.
Absorption results for the first two quarters appear to be following
historical seasonal trends with stronger periods of positive absorption in
the first and third quarter of the year and near-zero or slightly negative
periods of absorption in the second and fourth quarters. However, on a YTD
basis, newly available space grew at a faster pace than leased space. YTD
leased space of 5.0M sq ft was up 10.6% y/y, while newly available space of
4.2M sq ft was up 41.7% y/y. While this would indicate that growth in supply
outpaced growth in demand in the market, we would argue this result should
be somewhat expected given record low vacancy in the market in 1Q08. Despite
the slight up-tick in vacancy in 2Q08, market vacancy was still at a low
point relative to historical levels, suggesting the market for asking rates
still favors landlords, at least in the short-term. The most meaningful
factor that could impact the strength of landlord’s negotiating position is
the size and availability of “shadow space” currently occupied by financial
services firms. If this space becomes readily available in the market, it
could dramatically increase market supply and slow rate growth in market
asking rates.
Summary:
| Total Inventory |
114.4 M sq ft |
431 buildings |
| Class A (1969-current) |
45.0 M sq ft |
55 buildings |
| Class B (1931-1969) |
25.8 M sq ft |
68 buildings |
Class C
(before 1931>250,000 sq ft) |
29.4 M sq ft |
61 buildings |
Class
D
(before 1931<250,000 sq ft) |
14.2 M sq ft |
247 buildings |
2Q 2008 Asking Rates:
| Class |
A |
B |
C |
D |
Wtd Avg |
| Direct |
$65.25 |
49.35 |
50.75 |
43.22 |
51.96 |
| Sublease |
47.97 |
36.89 |
38.50 |
20.00 |
44.70 |
| Wtd Avg |
63.90 |
49.05 |
50.30 |
42.64 |
52.91 |
2Q 2008 Asking Rates vs. 1Q 2008:
| Class |
A |
B |
C |
D |
Wtd Avg |
| 2Q 2008 Wtd Avg |
$63.90 |
49.05 |
50.30 |
42.64 |
52.91 |
| 1Q 2008 Wtd Avg |
62.88 |
48.78 |
48.17 |
42.16 |
50.74 |
| |
1.02 |
0.27 |
2.13 |
0.48 |
2.16 |
2Q 2008 Asking Rates vs. 2Q 2007:
| Class |
A |
B |
C |
D |
Wtd Avg |
| 2Q 2007 Wtd Avg |
$63.90 |
49.05 |
50.30 |
42.64 |
52.91 |
| 2Q 2006 Wtd Avg |
55.00 |
40.82 |
39.82 |
38.69 |
43.50 |
| |
8.90 |
8.23 |
10.48 |
3.95 |
9.41 |
Completed transactions.
The fifteen largest lease transactions completed
in the Downtown market in the second quarter of 2008 are as follows:
| |
Address |
Tenant |
Square Feet |
| 1 |
26 Broadway |
SpeechCycle |
28,000 |
| 2 |
One Exchange Plaza |
Teliris |
17,000 |
| 3 |
33 Whitehall Street |
Cognet Communications |
16,564 |
| 4 |
20 Broad Street |
FriendFinder Networks, Inc. |
16,000 |
| 5 |
17 Battery Place South |
CSA Group |
14,000 |
| 6 |
14 Wall Street |
Kable Distribution Services |
12,486 |
| 7 |
One Exchange Plaza |
Fog Creek Software |
10,000 |
| 8 |
22 Cortlandt Street |
DB/URS |
8,650 |
| 9 |
61 Broadway |
Fidelity Brokerage
Services |
8,629 |
| 10 |
40 Wall Street |
Euroclear Bank |
8,313 |
| 11 |
130 William Street |
The U.S. Census Bureau |
8,000 |
| 12 |
61 Broadway |
NY Artnet Worldwide
Corporation |
7,630 |
| 13 |
14 Wall Street |
BATS Trading, Inc. |
6,000 |
| 14 |
14 Wall Street |
Deutsche Telekom |
5,658 |
| 15 |
90 Broad Street |
Rick Steiner Fell &
Benowitz, LLP |
5,310 |
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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