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Midtown South Major Market Analysis:
Canal Street to 42nd Street
River to River: Second 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 second 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% |
574 |
4.8% |
$84.35 |
| B |
25,459 |
16% |
1,602 |
6.3% |
$56.02 |
| C |
45,481 |
28% |
2,396 |
5.3% |
$55.87 |
| D |
77,121 |
48% |
2,775 |
3.6% |
$52.40 |
| Total |
159,999 |
100% |
7,347 |
4.6% |
$56.82 |
Key takeaways from our review of the
quarter include: Midtown South’s average
asking rate declined sequentially for the first time since the onset of the
credit crisis. 2Q08 represented the third full
quarter since the onset of the credit crisis in 3Q07 and the first quarter
in which the market experienced a quarter over quarter decline in the
average asking rate. The average asking rate for the market decreased $0.26
psf from 1Q08, to $56.82 psf. While this result still represented 11.3% y/y
growth, it is worth noting that this represented a significant deceleration
in growth from 14.7% last quarter and 17.9% growth in 4Q07. The asking rate
decrease was driven by a decrease in the average Class A asking rate, nearly
offset by an increase in the Class C asking rate. The Class A rate fell
$3.00 psf, to $84.35 psf, driven by a $13.82 psf decrease in the Class A
direct asking rate that occurred as availability continued to be reduced at
1095 Ave of the Americas. This property has been a major driver of the
decline in the average Class A asking rate ever since 1M sq ft of
availability came on the market at this property at the above average asking
rate of $90 psf in 2Q06. Since that time, availability has declined as space
has been taken, and only 100K sq ft of direct space and 13K sq ft of
sublease space remains at an average $136 psf asking rate. The decline in
2Q08 amounted to approximately 100K sq ft, resulting in the dramatic decline
in the Class A asking rate witnessed in the quarter. While Class A
availability accounted for only 8% of total market availability, the Class A
asking rate represented a 51% premium to the Class B rate, so the decrease
in the Class A rate still had a meaningful impact on the market as a whole.
As mentioned before, the Class A decrease was offset by an increase in the
Class C asking rate. The Class C rate increased $2.18 psf to $55.87, up
31.5% y/y. The increase was driven by several meaningful rate increases,
including a $15.83 psf increase on 65K sq ft at 1350 Broadway to $71.40 psf
and a $10.20 psf increase on 72K sq ft at 500 Seventh Ave to $48.00 psf.
2Q08 average asking rate results by building class include:
- Class A asking
rate declined 10.9% y/y to $84.35 psf, representing a $3.00 psf decline from
last quarter. The y/y decline in the quarter represented a deceleration in
growth from positive 5.1% y/y growth in 1Q08 and the first y/y decline in
the current cycle.
- Class B asking
rate grew 12.6% y/y to $56.02 psf, up $0.16 psf over last quarter, though
still representing a deceleration from 14.2% growth in 1Q08 and 26.3% y/y
growth in 2007.
- Class C
asking rate posted the strongest growth of any building class at 31.5% y/y
to $55.87 psf. This represented a $2.18 psf increase over last quarter, but
still represented a slight deceleration from 33.0% y/y growth in 1Q08.
- Class D
asking rate grew 26.7% to $52.40 psf, up $0.79 psf over last quarter. Like
those of the other building classes, the Class D rate experienced a
deceleration in asking rate growth from 31.9% in 1Q08, which represented
peak growth for the building class in the current cycle.
Vacancy saw a meaningful decline and a return
to a y/y decrease. Vacancy in the quarter fell to
4.6%, down 58 bps from last quarter and down 52 bps y/y. The quarter’s
vacancy represented a return to declining vacancy after four quarters of
flat vacancy in the 5.1-5.2% range since 2Q07. The decline in the quarter
represented a 931K sq ft decrease in availability, or an 11.2% reduction
from 1Q08 availability. The decrease was driven by vacancy declines across
A, B and C properties, while Class D vacancy remained essentially unchanged
from last quarter.
2Q08 vacancy results by building class include:
- Class A
vacancy fell to 4.8%, down 261 bps from 1Q08 and down 519 bps y/y. The
vacancy reduction in the quarter represented a 311K sq ft, or 35.2%,
reduction in availability from last quarter.
- Class B
vacancy decreased to 6.3%, down 186 bps from 1Q08, but up 47 bps y/y.
The vacancy reduction in the quarter represented a 73K sq ft, or 10.4%,
reduction in availability from last quarter.
- Class C
vacancy decreased to 5.3%, down 108 bps from 1Q08 and down 82 bps y/y.
The vacancy reduction in the quarter represented a 489K sq ft, or 16.9%,
reduction in availability from last quarter.
- Slightly offsetting declines in the other three
building classes, was a slight increase in Class
D vacancy, to 3.6%, up 7 bps from 1Q08 and up
5 bps y/y. The vacancy increase in the quarter represented a 56K sq ft,
or 2.1%, increase over last quarter.
Net Absorption was positive and showed a
dramatic increase in market activity.
We track net absorption in the market (leased space less newly available
space) as a means of gauging the relative strength of demand relative to new
supply in the market. Net absorption in the second quarter was positive 931K
sq ft, resulting in the reduction in availability of the same size mentioned
above. Net absorption in the quarter was the result of 4.7M sq ft of leased
space, partially offset by 3.7 sq ft of newly available space. The quarter
marked both a return to significant positive absorption in the market as
well as a significant increase in market activity after four quarters of
reduced activity in the wake of the credit crisis. In our view, reduced
activity occurred as market participants delayed long-term real estate
decisions in order to assess the extent and severity of the market slowdown.
As such, the increased activity likely includes some pent up supply and
demand from delayed moves by both tenants and landlords that would have
likely occurred in earlier periods had the market been less uncertain.
As a result, comparisons of the current period to prior periods and year ago
periods have become slightly less meaningful. However, a comparison of YTD
absorption measures evens out some of these timing issues and provides some
insight to the relative strength of the market. On a YTD basis, absorption
was still positive, though growth in leasing was outpaced by growth in new
supply. YTD leasing of 6.9M sq ft was up 36.1% y/y while YTD newly available
space of 6.0M sq ft was up 136.0% y/y. This resulted in positive YTD net
absorption of 898K sq ft, down from 2.5M sq ft of positive absorption in
2Q07. While this data, on the surface, would seem to imply a shift in market
fundamentals favoring tenants, we would note that current record low vacancy
of 4.6% leaves little room for additional vacancy reductions, suggesting
sustained future positive absorption is probably unlikely. We believe
absorption has a structural lower limit, similar to the structural
unemployment, that will always exist in the market regardless of the
strength of demand. This structural limit exists by virtue of the fact that
some percentage of leases in the market place will always be reaching
maturity and some tenants will always be looking to relocate. As a result,
we continue to see tight market supply favoring landlords in the short-term,
though deteriorating economic conditions and significant job losses are
expected to drive an increase in vacancy over the next 12 to 24 months. 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 |
2Q 2008 Asking Rates:
| Class |
A |
B |
C |
D |
Wtd Avg |
| Direct |
$87.75 |
57.49 |
56.33 |
53.69 |
57.74 |
| Sublease |
74.01 |
48.36 |
52.60 |
38.75 |
50.42 |
| Wtd Avg |
84.35 |
56.02 |
55.87 |
52.40 |
56.82 |
2Q 2008 Asking Rates vs. 1Q 2008:
| Class |
A |
B |
C |
D |
Wtd Avg |
| 2Q 2008 Wtd Avg |
$84.35 |
56.02 |
55.87 |
52.40 |
56.82 |
| 1Q 2008 Wtd Avg |
87.35 |
55.86 |
53.68 |
51.62 |
57.07 |
| |
(3.00) |
0.16 |
2.19 |
0.78 |
0.78 |
2Q 2008 Asking Rates vs. 2Q 2007:
| Class |
A |
B |
C |
D |
Wtd Avg |
| 2Q 2008 Wtd Avg |
$84.35 |
56.02 |
55.87 |
52.40 |
56.82 |
| 2Q 2007 Wtd Avg |
94.69 |
49.76 |
42.49 |
41.35 |
51.05 |
| |
(10.34) |
6.16 |
13.38 |
10.05 |
5.77 |
Completed transactions.
The fifteen largest lease transactions completed
in the Midtown South market in the second quarter of 2008 are as follows:
| |
Address |
Tenant |
Square Feet |
| 1 |
375 Hudson Street |
Saatchi & Saatchi |
819,000 |
| 2 |
1 Madison Avenue |
Credit Suisse |
257,837 |
| 3 |
395 Hudson Street |
Newsweek |
165,000 |
| 4 |
11 Madison Avenue |
Enfatico |
98,175 |
| 5 |
229 West 36th Street |
The American Language Communications Center |
65,000 |
| 6 |
620 Eighth Avenue |
British Telecom |
63,000 |
| 7 |
315 Park Avenue South |
Credit Suisse |
55,745 |
| 8 |
335 West 16th Street |
The School of Visual
Arts |
54,000 |
| 9 |
529 Fifth Avenue |
Finlay Fine Jewelry
Company |
53,745 |
| 10 |
500 Seventh Avenue |
Flack & Kurtz |
50,000 |
| 11 |
132 West 31st Street |
Facts on File |
40,670 |
| 12 |
599 Broadway |
Jeff Sutton |
40,000 |
| 13 |
185 Varick Street |
Dish Network Corp |
29,000 |
| 14 |
350 Hudson Street |
Newswire Association |
26,000 |
| 15 |
530 Seventh Avenue |
Triumph Apparel |
25,200 |
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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