Downtown Manhattan Office Market Outperforms Midtown and Midtown South for First Time in Several Quarters
Avison Young announces first quarter 2013 Manhattan office market analysis
Following a year characterized by rising vacancy rates, the Downtown Manhattan office market dramatically reversed direction during the first few months of 2013, outperforming both Midtown and Midtown South for the first time in several quarters.
These are some of the key trends noted in Avison Young’s first quarter 2013 Manhattan office market analysis.
An increase in the number of new deals in excess of 50,000 square feet (sf) is credited with generating positive absorption for Lower Manhattan during the first quarter of 2013. Seven such deals were completed in the first three months, including three in excess of 100,000 sf. During the same period in 2012, only four leases in excess of 50,000 sf were completed Downtown, including one renewal.
“Downtown is certainly the comeback kid, performing notably better than its Manhattan counterparts during the first few months of the year,” comments Greg Kraut, Avison Young Principal and Managing Director of the company’s New York City office. “This is truly remarkable considering the devastation caused by Hurricane Sandy to Lower Manhattan late in 2012, and the significant amount of space that was available Downtown just a year ago.”
Adds Kraut: “It is expected that the availability of prime space at a significant discount, relative to Midtown and Midtown South, will continue to provide Lower Manhattan with the competitive advantage as the choice destination for value-conscious tenants seeking quality space.”
In contrast to the positive absorption experienced in the Downtown office market during the first quarter of 2013, Midtown’s vacancy rate was relatively unchanged from the previous quarter, while Midtown South experienced an increase in vacancy as a result of several large blocks of space recently put on the market. Manhattan’s overall average asking rent finished the quarter at $58.08 per square foot (psf), up from $57.83 psf at the end of December. The overall vacancy rate for Manhattan’s office market remained unchanged quarter over quarter at 11.8%.
After rising throughout 2012 and spiking at 16% in the fourth quarter of 2012, Downtown’s class A vacancy rate dropped to 14.8% in the first quarter of 2013.
Recently completed new leases in Lower Manhattan include longtime Midtown tenant Harper Collins committing to 185,000 sf at 195 Broadway, and Conde Nast taking 80,000 sf at 222 Broadway. The latter is in addition to the 1 million square feet (msf) leased by the media giant at One World Trade Center in 2011. In another notable transaction, Liberty Mutual doubled its Downtown presence by taking 120,000 sf at 55 Water Street.
The Downtown market currently has several large-block opportunities in high-profile buildings, making it well positioned to attract large tenants willing to relocate from Midtown, as well as cost-conscious occupiers priced out of Midtown South. Average class A rents for Downtown changed minimally to $48.90 psf from $48.96 psf quarter over quarter, and remain well below the average for both Midtown and Midtown South.
“Historically, we have seen that during certain market cycles, the price differential between Downtown average rents and those of Midtown reach a point whereby tenants will seize the opportunity to relocate Downtown,” notes James Delmonte, Avison Young Principal and Vice-President of Research, New York City. “Recent market activity indicates that we are currently in the midst of one of those cycles.”
According to Avison Young, Midtown’s class A vacancy rate rose slightly to 12.5% during the first quarter of 2013 from 12.3% at the end of 2012. Large blocks of space placed on the market at 335 Madison Avenue and 125 Park Avenue contributed to the increase.
While three of the largest deals for the quarter were renewals, there were several new leases in excess of 50,000 sf signed in Midtown, including eMarketer’s 55,573-sf lease at 11 Times Square.
The largest transaction completed in Midtown during the first quarter was Macy’s renewal at 11 Penn Plaza for 646,000 sf. Although the other two deals in excess of 100,000 sf that closed since the beginning of the year were also renewals, they included expansion space: Jefferies & Company’s renewal and expansion at 520 Madison Avenue was for a total of 457,797 sf, and EisnerAmper’s renewal and expansion at 750 Third Avenue was for 150,000 sf.
Absorption was nearly flat for the quarter as the aforementioned leasing activity helped to offset space coming back to the market. With no major space dispositions on the immediate horizon, Midtown’s vacancy is expected to tighten heading into the second quarter.
Class A rents for Midtown moved slightly higher to $71.79 psf in the first quarter of 2013 from $71.55 psf at the close of 2012. Across Midtown, class A rents currently range from $49.23 psf in Penn Station to $103.09 in the Plaza District.
Tenants on the hunt for space in Midtown South received a few more options during the first quarter as several blocks of space came onto the market at 395 Hudson Street and 28-40 West 23rd Street. As a result, Midtown South’s overall vacancy rate rose to 9.1% and absorption was negative. The largest deal completed was J. Crew’s expansion at 770 Broadway for 79,735 sf.
“Midtown South has been the darling of the Manhattan office market, with tech and new media firms flocking to the area and changing the landscape,” says Delmonte. “However, because of Midtown South’s appeal, the increase in demand has led to pricing being pushed higher. This in turn is forcing newer tenants to seek out other alternatives, such as adjacent neighborhoods and even Lower Manhattan, where we’re now starting to see an increase in activity.”
Delmonte notes that class A rents in Midtown South posted minimal changes during the first quarter, finishing at $68.44 psf compared with $68.41 psf during the previous quarter.
Employment forecasts at both the national and local levels are encouraging, with overall employment up substantially from last year. The New York City economy continued to expand with 84,600 jobs added during 2012, according to the New York State Department of Labor, despite the financial sector losing more than 5,000 jobs last year.
The hiring trend continued into the early part of 2013, with 19,400 jobs added to the private sector and the city’s employment level reaching a new high in January, rising to 3.9 million jobs. Avison Young notes that longer-term rental spikes are possible in mid-to-late 2014 as office-using employment passes the pre-recessionary peak.
“While overall activity for the last two years was driven largely by renewals, it was encouraging to see that new leasing activity rose in the first quarter and that an accelerated pace of hiring is predicted for the latter part of the year, which should translate into positive absorption for the office market,” states Avison Young Principal Adam Rappaport. “Downtown, in particular, remains attractive to a number of industries due to the best-in-class space available and value-driven pricing. In addition, recent stock market gains may foreshadow an increase in hiring on Wall Street, which should be another boon for Lower Manhattan.”
Founded in 1978, Avison Young is Canada's largest independently-owned commercial real estate services company. Headquartered in Toronto, Ontario, Avison Young is also the largest Canadian-owned, principal-managed commercial real estate brokerage firm in North America. Comprising more than 1,200 real estate professionals in 44 offices across Canada and the U.S., the full-service commercial real estate company provides value-added, client-centric investment sales, leasing, advisory, management, financing and mortgage placement services to owners and occupiers of office, retail, industrial and multi-residential properties.