Signing office leases at or above $100 per square foot was once considered a benchmark in the Manhattan Midtown market. But as average lease rates climb rapidly quarter by quarter, this standard has become somewhat more accepted and commonplace – to the delight of landlords.
“What’s happening at this point is that quality space and quality buildings are few and far between and vacancy is at its lowest point in six years, so people start bidding up rents and create more competition for this kind of space,” said Frank Doyle, managing director of the New York region at Jones Lang LaSalle.
The Midtown market registered a 7.8 percent vacancy rate, with class A rents averaging $54.41 per square foot at the end of 2005, the lowest since the third quarter of 2001, according to Cushman & Wakefield. Additionally, the number of leases at $70 per square foot or above increased to 78 from 48 in 2004. There were at least 16 lease deals in Midtown that achieved rents of $100 or more in 2005 (see chart).
Traditionally, those buildings commanding the highest rents are located in the Plaza District and offer smaller floor plates, upscale amenities, great views of Central Park, a prestigious tenant roster, and high-end security. And the majority of tenants who are willing to pay for this high-rent space are hedge funds.
“It’s certainly a growing niche market,” said Jim Fredericks, executive managing director at Colliers ABR, referring to $100-per-square-foot rents. “For example, we have a floor and a half at 277 Park Avenue and we already have people lined up with rents in excess of what we’re asking for.”
Marcus Rayner, a principal at CRESA Partners, expects $100-plus rents to become less of a threshold and more of an everyday reality as the year moves on. In his estimation, five to six buildings in the market are approaching that level of rents and that by the end of the year, several of them will command $100 per square foot or more.
“The investment community believes that rents will increase 10 to 15 percent over the next year,” Rayner said. “So any buildings that ask for $85 to $90 per square foot could be changing to $100 per square foot or more.”
Fredericks also has seen high-endécorporate users rent out Plaza District space outside its main headquarters for company chairmen, while some Downtown law firms are taking this space to serve as an impressive conference area for partner meetings. And, ironically, multi-national firms view the $100-per-square-foot rents as a bargain.
“These are tenants that cater to a high-end clientele. They also need to catch and retain high-level talent,” Doyle said. “So when you talk about a 10,000-square-foot floor plate and paying $10 to $15 per square foot more, on a relative basis, this is an inexpensive way to get the best.”
A bargain is in the eye of the beholder, it seems – especially if that eye is on someone well outside of the city.
“New York,” Fredericks said, “is relatively cheap compared to other world centers like London or Tokyo, so why not step up and reach a little further for a great space? As profits increase, it will be so much easier for companies to justify paying more for lavish space.”