Despite the fact that large financial institutions continue to downsize, leasing is up in Manhattan’s priciest market, Midtown, due to increased demand from hedge funds and private equity firms, Colliers International’s commercial market report for the second quarter shows.
“Leasing is up dramatically [in Midtown North],” explained Joseph Harbert, president of the eastern region at the commercial brokerage, referring to an area north of 38th Street that many brokerages simply call “Midtown.” Harbert was speaking to reporters and brokers at an informational lunch at Aureole, a Midtown restaurant, this afternoon.
A total of 5.6 million square feet of space was leased in the second quarter in Midtown, up from just over 2 million the previous quarter and the highest quarterly volume since 2007, Colliers’ numbers show. Net absorption in the market was over 750,000 square feet.
Even the supposedly beleaguered Plaza District showed marked improvement, with leasing up 255 percent, to 2.73 million square feet from 1.07 million, over the previous quarter. The area — between East 47th and East 55th streets and Central Park and the East River — had the highest vacancy rate of any Manhattan submarket last year, due to its dependence on financial services.
Of course, there are caveats. While smaller financial firms such as hedge funds, which don’t answer to shareholders (and therefore find small rent increases “meaningless,” according to Harbert) are both re-upping their space and doing direct deals, brokers should not hold their breath for the recovery of large financial firms such as banks — the segment which, for the last 15 years at least, has functioned as the bedrock of commercial leasing activity in Manhattan.
“The financial sector was down substantially year-over-year,” Harbert said.
When asked when large financial firms would rebound, he said bluntly: “They have to stop shrinking first.”
Indeed, leasing by financial services firms fell to 19.5 percent of total activity year-to-date, compared to 30 percent of activity in the first half of 2012—the steepest slump but for the media and communications sectors, which leased only 5.5 percent of space, down from 21.7 percent in the same period last year, Colliers’ numbers show. Legal services absorbed some of the slack, increasing to 11.7 percent of total activity from 2.6 percent.
Rents in so-called Midtown North also declined slightly, to an average asking rent of $69.01 per square foot for direct space, and $54.03 for sublease space.
Rents in Midtown also showed larger spreads between asking and taking compared to other markets: average taking rents were between 80 and 90 percent of ask, per Colliers. In the much-hyped Midtown South market (where pricing remains lower than in Midtown, but so does vacancy) taking rents were on average just over 90 percent of ask.
“Densification,” the term brokers have coined for firms’ habit of cramming more people into less space since the recession, is also intensifying, and contributing to negative absorption Manhattan-wide, brokers said. The negative absorption — nearly half a million square feet were added to the borough’s office market this quarter, the data show — also reflects large spaces that have recently come to market, such as the 1.2 million square feet UBS is subletting at 299 Park Avenue.
Of course, this doesn’t mean that it’s exactly a tenants’ market, Harbert said.
“It’s fine [for tenants] in terms of pricing,” he said. “But it’s not fine when it comes to finding the space … that works.”