April, 30, 2008

The Manhattan office market is still wallowing in a slowdown that is expected to continue, though many brokers bet Midtown South neighborhoods will weather the storm better than their neighbors to the north and south, a shift largely attributed to its lower rents.

CB Richard Ellis reported average rents in the $40s in Midtown South throughout last year, making it an attractive alternative to Midtown, which reached peak average asking rents in the $80s.

The Midtown South market saw extremely low vacancy rates throughout 2007, as low as 4 percent in the spring of 2007, according to reports from CBRE.

The same trends can be seen in data collected by Colliers ABR, which had a higher estimate of the vacancy rate and slightly lower estimate of average asking rent (see chart on right).

While vacancy rates have clearly crept up in recent months, businesses looking for less costly space in an uncertain economy could help boost leasing activity in Midtown South's neighborhoods — including Penn Plaza, the Garment District, Flatiron and Soho — and help the area avoid the substantial rent reductions predicted for Midtown and Downtown over the next six months.

"There is a big difference between the per-square-foot drop you may see in Midtown South, and the per-square-foot corrections you can expect in the northern Midtown market," said Fred Posniak, senior vice president of W&H Properties, which manages properties both on the northern edge of Midtown South, including the Empire State Building, and in Midtown. "The prices have escalated more in Midtown, and they will drop more there on a percentage basis in the next six months as a result."

He said that in the Penn Plaza District, neither W&H nor its competitors have reduced rents.

Midtown South, as defined by research firm CoStar, includes the Penn Plaza/ Garment District, Chelsea, Flatiron, Gramercy, Hudson Square, Soho and Greenwich Village.

Esther Zar, vice president of the tenant representative agency Metro Spire, observed that certain niche submarkets in Midtown South cater to such "culture-specific" prospective tenants — creative media and advertising businesses seeking open lofts, for example — that they have been able to hold higher prices. She includes Flatiron, Union Square and Soho in this list. "Certain tenants will go there, and they will go there no matter what," she said.

Another reason why Midtown South may fare better in coming months: The companies hit most directly by the credit crunch, those in the financial services, are located mainly in large spaces in upper Midtown and Downtown.

Posniak predicts that the Sixth Avenue corridor in Midtown, from 42nd Street to Central Park, will see a significant slowdown in leasing throughout the remainder of the year. "There will be less 800-pound gorillas, the ones who eat up 30,000- to 100,000-square-foot spaces."

His point is backed by data. The first quarter of 2008 saw a noticeable slowdown in leasing of large spaces, over 30,000 square feet; the market for smaller spaces, however, has remained healthier, and many experts expect this trend to continue.

Matt Bergey, senior associate at CB Richard Ellis, believes that most large tenants will hesitate more, and hold off on signing leases until at least the third quarter to the end of 2008.

This trend will boost areas with smaller floor plates, which largely includes Midtown South districts. They'll fare better than their big-space counterparts, experts said.

"If you look at buildings down there [in Midtown South], they have anywhere between 2,000- and 5,000-square-foot floor plates, and a lot of them are smaller," Bergey said. For loft space on side streets, floor plates can average 4,000 to 8,000 square feet in Midtown South, according to Zar.

Some outliers exist, including 111 Eighth Avenue and 601 West 25th Street in Chelsea, which have extremely large floor plates. Bergey said these buildings are likely to suffer from the tenant slowdown as well.

But for the most part, the office buildings in Midtown South neighborhoods have smaller spaces than in Midtown and Downtown, and tenants looking for smaller locations often behave differently than their larger counterparts when searching for space.

"Smaller tenants are more flexible than larger ones, because their decision-making is more nimble," said Howard Dolch, executive vice president of Lansco.

Abie Hidary of Hidrock Realty, which specializes in spaces between 3,000 and 10,000 square feet, said that tenants in that range are still signing leases.

In the past few years, Midtown South has seen a slew of office buildings converted to residential. The conversion of 141 Fifth Avenue in the Flatiron District to high-end residential condominiums is a recent example.

The effect of this has been twofold: It both decreases the amount of office space available for leasing in the market as it brings more people to the area, making it a more desirable place to live and work.

"There are so many office buildings that became office condos or residential [in Midtown South] that even ignoring the increased demand there in the last year, we would have seen escalating rents just from the decrease in supply," said Matthew Astrachan, executive vice president at Cushman & Wakefield.

And in the footsteps of new residential projects, an addition of restaurants, retail and other neighborhood amenities has turned many areas between 14th and 42nd streets into 24-hour communities.

"The area around Seventh Avenue, from 27th to 34th Street, is seeing more higher-end retailers and banks moving in," Zar said, mentioning a Washington Mutual moving in to Seventh Avenue and 30th Street.

"In terms of tenant desirability, Midtown South has great access to both Penn Station and Grand Central, and now it has more amenities, making it more socially acceptable," said Barry Hersh, clinical associate professor at New York University's Real Estate Institute.

Beside the price point, Dolch points out an often overlooked advantage to areas south of 42nd Street. "Very often I run into clients who, price notwithstanding, prefer being in Midtown South because you're not surrounded and closed in by high-rise buildings," he said. "The scale is more humane."

Author: James Kelly