Asking rents for office space in Midtown South have finally shaken off the long post-September 11 malaise.
In the fourth quarter of 2006, Midtown South’s weighted average asking rents totaled $40.55 per square foot, according to Cushman & Wakefield, the highest level since the first quarter of 2001, when they totaled $43.71.
Brokers expect higher asking rents in Midtown South this year, with some landlords pushing above the $50 mark. The uptick in Midtown South reflects an overall banner year for Manhattan commercial real estate in 2006.
Though Midtown South has long been viewed as a less attractive alternative to its northern neighbor, the rapid acceleration of prices there is prompting tenants to try the area, and inspiring a willingness to pay more when they do.
The area is also benefiting from revitalization, particularly the momentum for development around Madison Square Park. In addition, say brokers, the lack of other inexpensive submarkets in Manhattan is helping this district, which runs from Soho to the Garment District.
“Where else will you move to?” asks Frank Coco, an executive director at Cushman & Wakefield. “The neighborhood has matured, and there’s definitely a cachet for certain businesses that want to be in that area.”
Even as rents have risen, demand from businesses, including nonprofits and media firms, has cut the amount of available space. For the fourth quarter of 2006, vacancy stood at 4.7 percent, down from 7.4 percent in the year-ago quarter. Vacancy rates in Midtown South are so low, in fact, that it is the second-tightest office market in the country, behind the high-tech haven of Bellevue, Wash., according to Cushman & Wakefield.
“The ask has exploded because the supply side has dwindled to nothing,” says Robert Silver, an executive managing director at Newmark Knight Frank.
Yet the overall vacancy rate masks particular weakness in the Hudson Square district, which had an eye-popping 23.4 percent vacancy rate in the fourth quarter, according to Newmark. Other parts of the district are far healthier, with essentially no space available in the Village, and just a 3.6 percent vacancy rate in the Flatiron/Union Square area, according to Newmark’s fourth quarter 2006 data.
While some tenants still look askance at Midtown South, that may be due to its high number of Class B buildings. Marc Miller, president of Miller & Partners, recently showed a 25,000-square-foot floor at 11 West 19th Street, a prewar building between Fifth and Sixth avenues that extends to 20th Street. One executive who viewed the space, however, commented that the floor was too deep. With windows mainly on two sides, the company would have limited ability to reward top brass with windowed offices.
“I could see that type of comment being very prevalent if I were bringing a law firm in there,” says Miller, adding, “the idea of a Park Avenue South address is less prestigious for some people than being on East 45th Street.”
Still, brokers say they are busy doing deals in Midtown South at increased rents. Two years ago, Coco of Cushman & Wakefield represented Penn Mutual Life Insurance in a move to 2 Park Avenue, with a 12-year lease for about 22,000 square feet at $37 per square foot. The company just added another 6,000 square feet at 2 Park Avenue for $53 per square foot.
Recent deals in the Meatpacking District illustrate the trend of rising rents. Cushman executive director Don Preate helped Moet Hennessy USA relocate from 2 Park Avenue to the trendier address of 85 10th Avenue in early 2005. The 6,000-square-foot space fetched $31 per square foot at the start of a 15-year lease. The tenant received a year of free rent and a $55-per-square-foot cash contribution to work.
A year later, EMI Music Publishing took 65,000 square feet at 75 Ninth Avenue (the Chelsea Market) one block away. EMI paid $44 per square foot for the first five years and $48 per square foot for the next five years, with $35 per square foot in work contributions, says Silver of Newmark, which is the agent for the building.
Landlords are trying to ride the wave of demand to higher rents. Brian Waterman, executive vice president and principal at Newmark, leases a couple of buildings in Midtown South for W & H Properties. He says 1359 Broadway was at $32 per square foot a year ago, but following a $54 million renovation, asking rents have moved to the high $40s to low $50s range. He says the recent deal by Kohl’s Corp. for 23,000 square feet at 1359 Broadway fetched rent in the high $40s. “The real question will be, with all these giant rents on buildings, will they be able to get it?” asks Silver. “I feel they will because there’s no space.”