The Real Deal New York

Nowhere to go but up

Manhattan office leasing collapsed last month, but experts anticipate improvement post-Labor Day

September 01, 2012
By Adam Pincus

Office leasing volume will almost certainly go up in September, brokers say, but that’s in part because of how far it dropped last month.

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Indeed, the level of office leasing nearly collapsed in August, as Manhattan tenants and landlords signed just 775,357 square feet of renewal and relocation leases — the lowest all year, preliminary data from commercial firm Cassidy Turley shows. That figure represents only about a quarter of the average monthly volume of 2.8 million square feet over the past five years. August’s tally was also less than half of the 1.8 million square feet leased in July.
Other market statistics were mixed.

Manhattan’s availability rate — which measures the amount of space available now or in the next 12 months — held steady in August at 10.3 percent. But the average asking rent rose by $0.95 per square foot, Cassidy Turley figures revealed.

Bruce Mosler, chairman of global brokerage at Cushman & Wakefield, said so far, 2012 was slower than expected. But he predicted that activity would pick up.

“I think the year will finish strongly,” Mosler said. “Because it’s been slow and there is pent-up demand. Post-Labor Day we will see it.”

Midtown

In a sign of weakness, Midtown was the only of the three markets to see a rise — albeit a slight one — in the availability rate, as new blocks of space were listed and leasing activity slowed.
The availability rate drifted up to 11.2 percent from 11.1 percent in July.

But there was some good news for landlords.

Owners increased prices slightly, with the average asking rent ticking up by $0.84 per square foot to $63.58 per foot, according to Cassidy Turley statistics.

In addition, Midtown was home to Manhattan’s second- and third-largest deals in August.

Salesforce.com, which provides computer cloud storage and services, signed a lease for 74,349 square feet at 685 Third Avenue, while British investment firm Rothschild North America relocated within 1251 Sixth Avenue, taking 69,418 square feet, Cassidy Turley data showed.

But James Wacht, president of commercial firm Lee & Associates NYC, said despite any positive market signs, he’s seeing sublease space in Midtown increasing.

“It’s a pretty good indicator of the weakness [in the market],” he said.

He added the main reason prices are not dropping is because landlords are afraid doing so will create more economic harm than just reducing their monthly revenue stream.

Wacht said cutting rents would lower the value of the building if it is refinanced or sold.

Midtown South

Midtown South has been the darling of the Manhattan market. Underscoring its favored status last month was the fact that it was home to Manhattan’s largest office lease, as reflected by Cassidy Turley data. That’s especially telling because the largest leases are usually done in Midtown or Downtown, where the bigger buildings are.

Clothing retailer J.Crew took the honors for that deal, inking an office lease for 80,000 square feet at 770 Broadway between 8th and 9th streets. The retailer is expanding in the building where it took approximately 295,018 square feet last year, CoStar data showed.

Rent figures were not available for the deal.

Some landlords, however, have been achieving very high rents in Midtown South. For example, in July the talent marketing agency IMG Worldwide signed a 28,312-square-foot lease at 200 Fifth Avenue for an estimated $85 per square foot, according to CoStar.

By comparison, the average Midtown South asking rent rose 2.7 percent to $47.69 per square foot in August. The rise over the past year was more dramatic. The average asking rent for Class A space in Midtown South was up 26 percent compared with August 2011, to $61.99 a square foot. At the same time, Midtown rose 11 percent and Downtown just 4 percent.

In addition, rents on the side streets in Midtown South are in the $50-per-square-foot range and higher, more than for comparable office space in the Grand Central area of Midtown, said Richard Farley of commercial firm ABS Partners Real Estate.

“It is a phenomenon that I don’t think we have ever seen before,” he said.

Yet some think the high prices in Midtown South, fueled partly by a tech boom, will decline.

“I don’t think that is sustainable,” Wacht said. “I don’t think it is a long-term trend.” The area’s availability rate dipped by 0.1 points to 8.1 percent in August.

Downtown

While large blocks of space are expected to come on the market in the coming years Downtown, space currently remains tight.

An analysis of CoStar data showed that only two blocks of space larger than 20,000 square feet were put on the market last month Downtown, compared with eight in Midtown.

One of the blocks, 26,953 square feet at Silverstein Properties’ 120 Wall Street, is currently occupied by the Jewish Child Care Association, a nonprofit that is consolidating in already leased space in Brooklyn.

Also, as TRD reported late last month, San Francisco-based law firm Sedgwick signed a lease to move its New York offices from about 75,446 square feet at 125 Broad Street to 43,374 square feet at Brookfield Office Properties’ 2 World Financial Center.

The availability rate Downtown was 10.2 percent, a 0.2 point drop from the prior month. During the same period, the average asking rent ticked up by $0.30 per foot to $38.80 per foot.

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