12/04/08

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Downtown now a landlord's market

Source: CBRE

It's a landlord's market for Downtown office space.

According to a report by Cushman & Wakefield, the Downtown vacancy rate dropped to 6.7 percent in April -- the first time it's been below the 7 to 9 percent range market observers say signifies equilibrium in the balance of power between landlords and tenants. The numbers say building owners now have the upper hand when negotiating leasing deals.

"When [vacancy] crosses what we consider the 7 percent threshold, we typically see more rent spikes from landlords," said Carri Lyon, senior director for the Downtown office at Cushman & Wakefield. "When it crosses the 5 percent threshold, we see it even more so."

Cushman & Wakefield reported the average rent rate Downtown at $41.61 in April, with rents ranging from $29 to $49 per square foot.

Rents in the Downtown market have been going up recently; generally by a dollar a month, Lyon said.

"[But] it's still the best deal in town. It's far cheaper than Midtown and Midtown South," she added.

Overall, the Manhattan market saw a 1.9 percent increase in the average asking rent in April from the previous month to $59.99, while the vacancy rate tightened from 5.0 percent to 4.5 percent, according to data from CB Richard Ellis.

"There is a constant appreciation of asking rates across the board," Travis Yuengst, head of research at CBRE, said. "We'll continue to see rent rates rise to historical records."

Midtown
In Midtown, the average asking rent continued to climb steadily in April. According to data from CBRE, average rents rose to $75.48 per square foot, a 1.8 percent increase from the previous month's rate of $74.14. Leasing activity more than doubled to 1.84 million square feet from the prior month.

"Over the last several months, there has been a rapid escalation in rents and increased leasing activity," said Brian Gell, vice chairman at CBRE. "It's very significant if the Midtown market will have the legs to stand over the next three to six months. Will this type of activity continue?"

Meanwhile, the Midtown vacancy rate dropped to 4.1 percent in April from 4.4 percent the previous month. Financial and legal firms fueled the increase in leasing activity.

"Leasing activity was extraordinarily high [in April] because of transactions that finally closed after lingering for some time," Gell said. "If leasing activity should continue at that type of accelerated pace, further price escalations are in store."

Midtown South
Midtown South was relatively flat compared to the month before, with a slight increase in rents and a slight decrease in vacancy. It lagged the Downtown and Midtown submarkets.

Average rents increased 1.2 percent in April to $43.04 per square foot from $42.55 the previous month, CBRE reported. Vacancy also tightened to 4.3 percent from 4.5 percent.

"The Midtown South market is static," said Yuengst. "There isn't a whole lot vacant, and leasing is neck and neck with last year."

Rising asking rents in Midtown mean Midtown South landlords are benchmarking themselves against that market, Yuengst said.

Among the biggest new leases in Midtown South was a deal by Viacom's MTV Networks to relocate part of its operations to 345 Hudson Street. Several of Viacom's television networks, including Comedy Central and TV Land, will join MTV in the move from 1515 Broadway in Midtown to 400,000 square feet of space at the new location.

Downtown
According to CBRE, the Downtown market saw a 4.1 percent increase in average asking rents to $44.51 in April from the previous month, a somewhat higher rent figure than Cushman & Wakefield reported.

Demand continues to squeeze vacancy, which reached 6.0 percent from 6.8 percent the month prior, even lower than the Cushman & Wakefield estimate.

"Downtown has lagged for the past couple of years and is now catching up in price differentials," said Gell, of CBRE.

Large blocks of space in Downtown are in great demand by tenants unable to fulfill their space requirements in Midtown. "Large blocks of space in postwar buildings are in short supply now, and rents there have escalated most rapidly," he said.

But according to Cushman & Wakefield's Lyon, the real bread and butter of the Downtown market are deals under 10,000 square feet.

A number of industries that can work within the smaller floor plates have headed Downtown, including legal, insurance and nonprofit companies.

"The cost-conscious are heading Downtown," Lyon said. "Everyone from Midtown is deciding they want to be here."

Since early 2006, an estimated 2.5 million square feet of office space in the Downtown market has been converted to more than 2,800 residential units, said Jonathan Mazur, senior associate at Cushman & Wakefield.

However, a number of buildings scheduled for residential conversion have backtracked to capitalize on the growing demand for office space in Downtown.

Most recently 233 Broadway, better known as the Woolworth Building, opted out of its plans to convert the towers into condo units. Approximately 150,000 square feet of office space in the iconic building will enter the market in the fourth quarter of 2007 or early 2008, Mazur said.