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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