The Real Deal New York

Price relief for Midtown South?

Brokers say the recent purchase of St. John’s Center could inject badly needed office space into the market

February 01, 2013
By Adam Pincus

The recent sale of a hulking, three-block-long office building straddling the border of Soho and the Meatpacking District may provide relief to tenants priced out of the famously tight Midtown South leasing market.

That’s because the buyers — a partnership of Fortress Investment Group, Atlas Capital Group and Westbrook Partners who purchased the property from long-time investor Eugene Grant — could get more aggressive about wooing new tenants in with competitive leasing prices.

The 1.3 million-square-foot St. John’s Center at 550 Washington Street has the largest floor plates in the city at 250,000 square feet each. It also clocks in as Manhattan’s largest block of office space — 700,000 square feet — on the market for the longest period of time, since 2006, a year before the building’s largest tenant, Merrill Lynch, vacated. But in the intervening years, few tenants seriously considered leasing there, industry insiders said, because of its tough leasing terms and Class C designation.

But the December deal — which city records show valued the building at $540 million — could change all that.

St. John’s Center should have no trouble attracting tenants. Two other million-square-foot buildings on the Far West Side of Manhattan — the Starrett-Lehigh building at 601 West 26th Street and the Terminal Stores building at 261 11th Avenue — have leased well and have low vacancies.

John Lizzul, managing director at Newmark Grubb Knight Frank, said the St. John’s Center “should be able to compete” with both of those megabuildings.

“The new ownership will certainly want to make deals [at St. John’s],” he said.

Elsewhere in Manhattan, financial firm Jefferies & Company inked a large renewal lease for 450,000 square feet at 520 Madison Avenue in the Plaza District.

That deal and others are “a fairly [positive] sign that we are going to have good activity this year,” said Dirk Hrobsky, managing director of the New York office for brokerage DTZ.

Despite the Jefferies deal and other transactions, the overall Manhattan availability rate — which tracks space that is vacant now or is listed for lease at any time in the future — rose slightly last month to11.6 percent compared to the end of last year, according to preliminary figures from commercial brokerage Colliers International. At the same time, the average asking rent in Manhattan dipped last month to $56 per foot.

Midtown

For years now, technology firms have been looking beyond Midtown South’s Silicon Alley because of tight supply and high prices.

Gaming and entertainment provider Alloy Digital is the latest example of this trend. According to CoStar Group, the firm is negotiating to sublease 29,416 square feet in Midtown on the 19th floor at 498 Seventh Avenue, a 936,611-square-foot office building at 37th Street, far to the north of Silicon Alley.

Joseph Mangiacotti and Chris Levinson of CBRE Group, who represent the sublease space, declined to comment.

While Alloy Digital is looking to lock in space, the advertising media agency Initiative is planning to leave its offices at 1 Dag Hammarskjold Plaza at 885 Second Avenue, between 47th and 48th streets. The building’s owner, the Lawrence Ruben Company, last month listed 138,582 square feet of space spread over six floors, including the Initiative space. Initiative, a division of the global Interpublic Group, has a lease at the building that runs until the end of 2014, CoStar data showed.

Despite the churn, Midtown’s office stats remained fairly flat last month.

The average asking rent there fell by 10 cents per foot in January to $66.56 per foot, while the availability rate rose by 0.2 points to 12.2 percent, according to Colliers.

Midtown South

Interpublic Group is planning additional moves in Manhattan as well. This year, it’s leaving three floors at 28–40 West 23rd Street, a mid-block Flatiron District building. Colliers, which represents the landlord, placed a 98,000-square-foot block (over four floors) on the market last month, according to CoStar.

Interpublic’s lease does not end until October, and listing broker Andy Roos, a vice chairman at Colliers, said he expected the space to be leased by then.

“We are seeing media tenants, new media and traditional advertising agencies” tour the space, he said. The space is listed for $62 per square foot, above last month’s Midtown South average asking rent of $47.04 per foot. (The availability rate in Midtown South, meanwhile, grew 0.4 points to 8.4 percent, the biggest jump of any of the submarkets, according to Colliers.)

Brokers said it was unclear what the near-term impact of the sale of the St. John’s Center building would have on Midtown South leasing. The four-story building, which is home to a division of Bloomberg L.P., has had nearly 694,485 square feet — more than half the building — available for 87 months, according to data from CoStar.

That is currently the longest time any block of space larger than 200,000 square feet has been on the market in Manhattan, a review of CoStar data shows.

And insiders predicted that the new owners would aggressively market the property for leasing.

“That whole West Side, Lower West Side and Tribeca area will only continue to thrive,” Hrobsky said. “For the last seven years, I bet until a year or so ago, you would not have said, ‘I want to be in that building as a big-floor-plate user.’ That probably [began] just after Google [took] over the whole of 111 Eighth Avenue.”

Downtown

Downtown is gearing up to welcome another new media tenant to its ranks. HarperCollins, a longtime Midtown tenant at 10 East 53rd Street, is moving to Lower Manhattan: The book publisher inked a deal last month at 195 Broadway, where it plans to move in 2014.

The company signed a 15-year lease for 185,000 square feet, according to news reports.

Downtown brokers said they’re hoping other Midtown-based companies will follow suit. The deal demonstrates that “Downtown is a viable option for a Midtown tenant,” said James Delmonte, a vice president and head of research for the New York office of commercial firm Avison Young.

With an eye to landing such a tenant, CBRE recently brought to market a block of space just over 100,000 square feet on five floors at 156 William Street. The space, which is currently occupied by the city’s Department of Youth and Community Development, has an asking rent of $37 per square foot, according to CoStar.

“We are hoping to attract tenants priced out of Midtown South and Midtown,” said Bradley Gerla, an executive vice president at CBRE, who is listing the space along with CBRE’s Jonathan Cope. “We are also talking with some medical tenants and [with others] as a possible office for some schools.”

The average asking rent Downtown last month was $44.10 per foot, a decline of $1.39 per foot from the end of 2012, the Colliers data showed. The availability rate Downtown fell 0.2 points last month to 15.2 percent.

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