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Midtown South Major Market Analysis:
Canal Street to 42nd Street
River to River: Third Quarter, 2008
Analysis
TThe 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:
| Building Class |
Inventory Sq Ft
(in ‘000s) |
% of Total
Inventory |
Availability Sq Ft
(in ‘000s) |
% Vacancy |
Avg Asking Rate ($/psf) |
| A |
11,938 |
8% |
722 |
6.0% |
$94.64 |
| B |
25,459 |
16% |
1,984 |
7.8% |
$55.95 |
| C |
45,481 |
28% |
2,891 |
6.4% |
$55.05 |
| D |
77,121 |
48% |
2,917 |
3.8% |
$49.34 |
| Total |
159,999 |
100% |
8,513 |
5.3% |
$56.66 |
Key takeaways from our review of the
quarter include: Midtown South’s average
asking rate showed a sequential decline and continued growth deceleration.
We have now completed the fourth full quarter of results
since the onset of the credit crisis in 3Q07, and the current quarter
represents the first quarter that saw a sequential decline in asking rates
since that time in the Midtown South market. The Midtown South average
asking rate fell $0.15 psf from 2Q08, to $56.66 psf, however, this still
represented 3.5% y/y growth in the quarter. The decline from last quarter
was a modest 0.3%, though the y/y growth has decelerated sharply from 11.3%
y/y growth last quarter and peak growth of 17.9% y/y in 4Q07. The decline in
the asking rate was driven by declines in Class B, C and D buildings, with
the most significant occurring in Class D properties, which accounted for
48% of total inventory and 34% of total availability in the market at
quarter end. The Class D average asking rate fell $3.06 psf, or 5.8%, from
last quarter to $49.34 psf, driven primarily by a reduction in the direct
asking rate. Reduction in the Class C and B asking rates were more modest at
$0.82 psf and $0.06 psf respectively. These reductions were partially offset
by a sizeable increase in the Class A asking rate, though at only 8% of
availability, Class A properties did not account for enough of the market to
offset the decline in the other building classes. The increase in the Class
A asking rate was driven by an increase in sublease availability at 1095 Ave
of the Americas from 12K sq ft last quarter to 83K sq ft in 3Q08. Both iStar
Financial and MetLife took space in the building at the top of the market,
but both have recently announced plans to sublease some or all of their
space. iStar’s space amounts to 107K sq ft, while MetLife’s commitment is a
much larger 400K sq ft. It remains to be seen if more of the space from
these two tenants is added to the market in coming months. The new sublease
space at the building is offered at an average asking rate of $145.00 psf.
The increase in sublease availability drove a $30.47 psf increase in the
average Class A sublease asking rate to $104.49 psf, and resulted in an
increase in the total average Class A asking rate $10.30 psf to $94.64 psf.
This increase in the Class A rate has increased the premium for Class A
space to 69%, down from a low of 51% last quarter. This premium had been on
a steady decline since 2Q06, when 1.0M sq ft of space at 1095 Ave of the
Americas first came on the market at $90.00 psf. At that time, the Class A
rate was at a 111% premium to Class B space. As space at this property was
leased over the subsequent eight quarters, its impact on the Class A asking
rate was reduced. However, during 3Q08, availability at this property
increased by 95K sq ft, primarily in sublease space, at a total average
asking rate of $136.02 psf. As is usual, Class B, C and D properties
continue to show asking rates in a fairly tight range, from $49.34 psf to
$55.95 psf.
3Q08 average asking rate
results by building class include:
- Class A buildings
saw a 3.0% y/y decline to $94.64 psf, though this y/y decline was actually
an improvement from the 10.9% y/y decline witnessed in 2Q08. The asking rate
in the quarter represented a $10.30 psf over last quarter’s rate.
- Class B buildings
saw 3.6% y/y growth to $55.95 psf, a deceleration from 12.6% y/y growth in
2Q08 and a $0.06 psf decrease from last quarter’s rate.
- Class C
buildings saw 14.4% y/y growth to $55.05 psf, a deceleration from 31.3% y/y
growth in 2Q08 and a $0.82 psf decrease from last quarter’s rate.
- Class D
buildings saw 9.9% y/y growth to $49.34 psf, a deceleration from 26.7% y/y
growth in 2Q08 and a $3.06 psf decrease from last quarter’s rate.
Vacancy increased after dip in 2Q08.
Vacancy in the quarter reached 5.3% in the Midtown South
market, after falling to a near record low of 4.6% in 2Q08. 3Q08 vacancy was
up 73 bps over last quarter, and up 26 bps y/y. Unlike the Midtown market,
most of the increase in Midtown South vacancy occurred in direct
availability. The increase represented a 1.17M sq ft increase in
availability, driven primarily by a 641K sq ft increase in Class C direct
availability and a 354K sq ft increase in Class B direct availability. The
resulting increases in total Class C and B availability were significant, as
they were up 20.7% and 23.8% over last quarter respectively. Properties that
contributed meaningfully to the Class C availability increase include 350
Fifth Avenue (up 222K sq ft to 383K sq ft of total availability) and 1140
Broadway (up 112K sq ft to 135K sq ft total), while properties that
contributed to Class B availability include 855 Avenue of the Americas (up
332K sq ft for a total of the same amount) and 605 Third Avenue (up 134K sq
ft to 142K sq ft total).
The increase in direct availability had the effect of increasing the
proportion of available space attributable to direct availability slightly
to 83.8% from 83.0% last quarter. However, in Midtown South, sublease
availability is offered at near par with direct availability, so the shift
in the type of availability had a minimal impact on the pace of asking rate
growth in the quarter.
3Q08 vacancy results by building class include:
- Class A
vacancy increased to 6.0%, up 124 bps since last quarter, but still down
256 bps y/y. The increase represented a 148K sq ft increase in
availability, driven by a 123K sq ft increase in sublease availability.
- Class B
vacancy was also up to 7.8%, up 150 bps over last quarter and up 90 bps
y/y. The increase represented a 381K sq ft increase in availability
driven by a 354K sq ft increase in direct availability.
- Class C
vacancy was up to 6.4%, up 109 bps over last quarter, but still down 41
bps y/y. The increase represented a 495K sq ft increase in availability
driven by a 641K sq ft increase in direct availability, partially offset
by a 146K sq ft decrease in sublease availability.
- Class
D vacancy was up to 3.8%, up 18 bps over last
quarter and up 88 bps y/y. The increase represented a 142K sq ft
increase in availability driven by a 125K sq ft increase in sublease
availability.
From a submarket perspective, vacancy was up in the third quarter for five
of the seven submarkets. Submarkets that saw vacancy increases were Union
Square, Port Authority, Murray Hill, Greenwich/Soho and East Village, while
the Flatiron/Gramercy and Chelsea submarkets both saw vacancy declines. It
is worth noting that all seven submarkets are showing vacancy results up
from prior lows at some point during 2007.
Net absorption turned negative, both in the
quarter and on YTD basis.
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 Midtown South market was negative 1.17M sq ft
in the quarter, which was caused by 1.9M sq ft of leased space more than
offset by 3.1M sq ft of newly available space.
3Q08 results represent a return to the dramatic y/y reductions in leasing
activity witnessed in the first quarter, after a period of strong leasing in
2Q08. Leased space in the quarter of 1.9M sq ft was down 28% y/y. This
occurred at the same time that newly available space grew 20% y/y. The
decline in leased space is at least partially due to timing, as 2Q was a
strong leasing quarter in the current year, vs. strong quarters of leasing
in 1Q and 3Q last year. An analysis of YTD absorption evens out some of
these timing issues and shows YTD leasing activity up 14.2% for the first
three quarters of the year to 8.8M sq ft, up from 7.7M sq ft last year.
However, growth in YTD newly available space outpaced growth in leased
space, with 78% y/y growth to 9.0M sq ft, up from 5.1M sq ft last year. This
resulted in YTD net absorption of negative 268K sq ft vs. positive net
absorption of 2.6M sq ft for the first three quarters of 2007.
Much like the Midtown market, the Midtown South market experienced a period
of significant positive absorption near the peak of the market in 2007. In
the first quarter of 2007, Midtown South absorption was positive 3.4M sq ft,
resulting in a drop in market vacancy to a record low of 4.5% from 6.7% in
the prior quarter. It is worth noting that, despite predominately negative
absorption since that time, total vacancy in the market at 5.3% is still
well below the vacancy level in 4Q06, just prior to the last period of
significant positive absorption. This suggests there is some support for the
minimal reductions we have seen in average asking rates as market supply has
not yet increased beyond 2006 levels, which was a period of double digit
asking rate growth in the market.. 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 |
3Q 2008 Asking Rates:
| Class |
A |
B |
C |
D |
Wtd Avg |
| Direct |
$90.15 |
57.33 |
55.96 |
49.80 |
56.34 |
| Sublease |
104.49 |
46.00 |
42.66 |
46.14 |
56.45 |
| Wtd Avg |
94.64 |
55.95 |
55.05 |
49.34 |
56.66 |
3Q 2008 Asking Rates vs. 2Q 2008:
| Class |
A |
B |
C |
D |
Wtd Avg |
| 3Q 2008 Wtd Avg |
$94.64 |
55.95 |
55.05 |
49.34 |
56.66 |
| 2Q 2008 Wtd Avg |
84.35 |
56.02 |
55.87 |
52.40 |
56.82 |
| |
10.29 |
(0.07) |
(0.82) |
(3.06) |
(0.16) |
3Q 2008 Asking Rates vs. 3Q 2007:
| Class |
A |
B |
C |
D |
Wtd Avg |
| 3Q 2008 Wtd Avg |
$94.64 |
55.95 |
55.05 |
49.34 |
56.66 |
| 3Q 2007 Wtd Avg |
97.54 |
54.00 |
48.11 |
44.88 |
54.77 |
| |
(2.90) |
1.95 |
6.94 |
4.46 |
1.89 |
Completed transactions.
The fifteen largest lease transactions completed
in the Midtown South market in the third quarter of 2008 are as follows:
| |
Address |
Tenant |
Square Feet |
| 1 |
350 Fifth Avenue |
Coty |
90,000 |
| 2 |
200 Varick Street |
Omnicom |
80,000 |
| 3 |
620 Ave of the Americas |
Cole Haan |
28,000 |
| 4 |
1400 Broadway |
Ellen Tracy |
28,000 |
| 5 |
350 Fifth Avenue |
Skanska USA Building |
24,391 |
| 6 |
1359 Broadway |
Actimize |
23,600 |
| 7 |
100 Fifth Avenue |
DeVito/Verdi |
22,500 |
| 8 |
435 Hudson Street |
Epoch Films |
15,000 |
| 9 |
100 Ave of the Americas |
DST Systems |
14,658 |
| 10 |
345 Hudson Street |
The Solomon R.
Guggenheim Foundation |
13,000 |
| 11 |
375 Hudson Street |
Weidlinger Associates |
12,609 |
| 12 |
229 West 28th Street |
ADT Security Services |
12,500 |
| 13 |
245 Fifth Avenue |
Broadband Enterprises |
12,000 |
| 14 |
60 Madison Avenue |
Material ConneXion |
12,000 |
| 15 |
1350 Broadway |
Open Space Institute |
12,000 |
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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