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Market Analysis

Midtown Major Market Analysis:

42nd Street to 62nd Street
River to River:

Second 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 been added 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% 8,522 7.0% $93.63
B 35,353 18% 3,387 9.6% $76.52
C 15,126 8% 937 6.2% $66.72
D 21,654 11% 1,812 8.4% $80.50
Total 193,242 100% 14,657 7.6% $86.33

Key takeaways of our second quarter analysis include:

Asking rate growth continued though at a slowing pace.  We have now completed three 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 $86.33 psf, up $2.66 psf since the end of last quarter and up $14.66 psf since 2Q07. The 2Q08 average asking rate represents 20.5% y/y growth, a deceleration from 23.1% y/y growth in 1Q08. In our view, the most significant driver of asking rate growth 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.

2Q08 average asking rate results by building class include:
 

  • Class A buildings saw 15.5% y/y asking rate growth to $93.63 psf. This represents a slowing in the pace of growth from the last six quarters, but it is still an increase of $12.56 psf over 2Q07’s $81.07 psf.
  • Class B buildings saw 18.8% y/y growth to $76.52 psf. This is also a significant slow down from peak growth in 4Q07 of 32.2%, but it is still a $3.60 psf increase over 1Q08’s $72.92 psf.
  • Class C buildings saw 23.0% y/y growth to $66.72, an acceleration from 21.0% y/y growth last quarter and a $2.66 psf increase over 1Q08’s $64.07.
  • Class D buildings saw 40.9% y/y growth to $80.50 psf, a dramatic acceleration from last quarter’s 28.8% y/y growth and enough to place the Class D rate higher than the average Class B and C asking rates. The Class D average rate for the quarter represents an $8.13 psf increase over 1Q08’s $72.37 psf rate. The increase was driven by the average asking rate for 627K sq ft of space at the old New York Times building at 229 West 43rd St, which reached $100 psf in 2008.

Vacancy continued to increase slightly.  Vacancy in Midtown continued to increase for the third straight quarter after hitting a two-year low in 3Q07 at 6.9%. 2Q08 vacancy reached 7.6%, representing a 18 bps increase over 1Q08, though still down 32 bps y/y. The vacancy increase amounted to a 343K sq ft increase in availability, driven by vacancy increases in Class A and D properties. Class A vacancy increased to 7.0% from 1Q08’s 6.6%, representing an increase in availability of 522K sq ft. Class D vacancy increased to 8.4% from 1Q08’s 7.7%, representing a 150K sq ft increase. Offsetting these two building classes was a reduction in Class B vacancy to 9.6% from 1Q’s 10.4%, driving a 288K sq ft reduction in availability. The Class B vacancy reduction was driven by a 522K sq ft reduction in availability at 380 Madison Avenue as the U.N. leases space here while the main UN facility undergoes renovations. As of 2Q08, Class A properties accounted for 58% of submarket availability, vs. Class B properties, which accounted for only 23%. Some of the biggest contributors to Class A vacancy include:
 
825 Eighth Ave 669K sq ft Available $92.33 psf Avg
120 Park Avenue 440K sq ft Available $N/A
30 Rockefeller Plaza 381K sq ft Available $130.17 psf Avg
1633 Broadway 360K sq ft Available $82.33 psf Avg
153 E 53rd Street 335K sq ft Available $N/A
805 Third Avenue 308K sq ft Available $63.20 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, Times Square, Midtown East, Rockefeller Center, and Park Avenue have all seen increases in vacancy after hitting a low point during the end of last year. All but Rockefeller Center, Times Square, and Park Avenue hit their vacancy low points in 3Q07 (Rock Center’s lowest vacancy was 9.1% in 2Q07; Times Square’s was 8.6% in 4Q07; and Park Avenue’s was 4.6% 1Q08). The only submarket in Midtown that continues to show vacancy declines is the Sixth Avenue submarket, which saw vacancy fall to 5.6% in 2Q08, from 6.4% in 1Q08 and 6.6% in 4Q07. However, we expect vacancy in this submarket will increase as financial services firms that occupy space on Sixth 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 343K sq ft of increased availability was the net impact of 5.2M sq of leased space offset by 5.6M sq ft of newly available space. Major lease deals that occurred during the quarter include RSM McGladrey (165K sq ft at 1185 Avenue of the Americas) and Highbridge Capital Management (110K sq ft at 40 W 57th Street). Properties that contributed most to newly available space include 120 Park Avenue (440K sq ft), 153 E 53rd Street (308K sq ft), and 345 Park Avenue (296K sq ft).

2Q08 results show a marked increase in activity relative to the last two quarters, though this increase occurred on both the supply and demand side, so the net impact was a relatively small change in total vacancy. Leased space of 5.2M sq ft was up from just 2.0M sq ft in 1Q08 and 2.1M sq ft in 4Q07, while newly available space of 5.6M sq ft was up from 2.6M sq ft in 1Q08 and 2.5M sq ft in 4Q07. However, the net result of only 343K sq ft of negative absorption represented only a small change in total market vacancy, for the third quarter in a row with little real change in vacancy. The trendline in absorption shows that the last meaningful change in vacancy occurred in 3Q07, when 1.9M sq ft of positive absorption dropped market vacancy to 6.9%. Over the last three quarters, total negative absorption was only 1.3M sq ft, so the market has not yet returned to 2Q07 levels. However, the full impact of availability at financial services firms has yet to be felt by the market. We expect to see increasing availability as these firms seek to sublease space left vacant by recent staff reductions. However, the lack of publicly available information about the potential size of this availability makes its ultimate impact difficult to gauge.

 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

2Q 2008 Asking Rates:

Class A B C D Wtd Avg
Direct $96.99 77.37 66.74 80.77 87.60
Sublease 78.04 59.91 65.00 62.50 74.95
Wtd Avg 93.63 76.52 66.72 80.50 86.33

2Q 2008 Asking Rates vs. 1Q 2008:
 
Class A B C D Wtd Avg
2Q 2008 Wtd Avg $93.63 76.52 66.72 80.50 86.33
1Q 2008 Wtd Avg 93.34 72.92 64.07 72.37 83.67
  0.29 3.60 2.65 8.13 2.66

2Q 2008 Asking Rates vs. 2Q 2007:
 
Class A B C D Wtd Avg
2Q 2008 Wtd Avg $93.63 76.52 66.72 80.50 86.33
2Q 2007 Wtd Avg 81.07 64.41 54.23 57.14 71.67
  12.56 12.11 12.49 23.36 14.66

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

 

Address

Tenant

Square Feet
1 1 Madison Avenue Credit Suisse 257,837
2 1185 Ave of the Americas RSM McGLadrey 164,700
3 1290 Ave of the Americas Cushman & Wakefield 156,282
4 825 Seventh Avenue Mediaedge 129,620
5 40 West 57th Street Highbridge Capital Management 110,000
6 120 Park Avenue Altria 100,000
7 711 Third Avenue Crain Communications 100,000
8 590 Madison Avenue Crowell & Moring LLP 100,000
9 711 Third Avenue Parade Publications 89,413
10 1185 Ave of the Americas News America 83,822
11 11 West 42nd Street Kohn Pedersen Fox 65,000
12 1 Rockefeller Plz DirecTV 64,475
13 620 Eighth Avenue British Telecom 63,000
14 399 Park Avenue Eton Park Capital Management 62,000
15 666 Fifth Avenue Victoria’s Secret 55,755


 


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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