As New York City real estate is to the country, the Plaza District seems to be to New York: The last to fall and the first to rise. In this month’s Q & A, The Real Deal talked to commercial brokers, analysts and building managers about the office district — one of the toniest commercial submarkets in Manhattan.
They said that while rents there declined by over 40 percent during the recession, they have shot up by as much as 32 percent in the last year, and the district is outperforming other high-profile commercial submarkets like Times Square in its recovery.
While rents are still far off from their peak and landlords are still offering concessions, the market has attracted headlines lately for how quickly it appears to be tightening — particularly on the high end.
For example, while landlords, especially those of smaller spaces, may have been willing to build out space for a tenant for the last few years, they are claiming they “want to get out of the construction business,” one source said, noting that they will still give a tenant an allowance to do so on their own.
Also, so-called country-club buildings like 9 West 57th Street, the GM Building and others have increased asking rents to $135 or $140 a square foot recently.
While deals haven’t been inked at that amount yet, brokers say the fact that landlords have the confidence to ask for that much is a good sign for the market.
Plus, brokers report that the velocity of deals over $100 has dramatically increased and that financial firms like private-equity and hedge funds are snapping up space again.
Still, brokers say there will be continued weakness for the middle and lower ends of the market, where tenants no longer seem willing to pay for the cachet of the fancy Plaza District name if they can go a few blocks in another direction for a lot less money.
For more on which buildings are performing best, what kinds of concessions are being offered and where the bargains are, we turn to our panel of experts.
Ben Friedland
senior vice president, CB Richard Ellis
We know that office rents in the Plaza District fell the sharpest of any submarket during the downturn, but that they’ve been increasing lately. How much of a discount off asking rents are tenants getting — if any — in the Plaza District right now, and how does that compare to three months ago, six months ago and a year ago?
Historically speaking, the Plaza District submarket is more volatile than the other submarkets. In April of last year, the average asking rent in the Plaza District was $63.17. In just a year’s time, the average has increased $20 a square foot, to the current $83.36. Comparatively, the overall Midtown market increased from $55.44 to just $58.14.
Have any buildings in the Plaza District hit the rents they were getting at the peak of the market? If so, which ones?
Rents are not where they were at the peak. At the height of the market, for tower space in the city’s top buildings, a few deals topped $200 a square foot. While there are a few smaller renewals being negotiated now in the $170-plus range for A++ space, overall, we’re not near $200.
How is the Plaza District doing in terms of recovery compared to other high-profile Manhattan submarkets like the Park Avenue corridor and Times Square?
The Plaza District rents are up 32 percent in the past 12 months, whereas Park Avenue is up 17 percent and Times Square is basically flat.
What kinds of incentives — if any — are landlords in the Plaza District offering to tenants these days? How much are they giving tenants in free rent and tenant improvements, and how does that compare to three months, six months and a year ago?
Landlords for the city’s top buildings work hard not to lower their rents during a downturn, as the rent of one deal often affects subsequent deals. So to remain an attractive alternative for high-end users … [landlords] often increase the value of the concession package. As the market has continued to improve, the value of the concession packages has decreased, and where landlords were willing to build space [in exchange for getting a lease term of] three to five years, that has generally shifted back to a minimum term of seven to 10 years. Average concession packages range from six to eight months of free rent … compared to six months to a year ago, when they were offering eight to 12 months of free rent.
We know that hedge funds traditionally have taken the most expensive space in the Plaza District. Are you seeing any change on that front, or any new types of tenants shopping for space in the area?
Financial firms, specifically hedge funds, wealthy family offices and private equity firms, continue to dominate. Of the 13 deals thus far in 2011 that have topped $100 a square foot, all but one have been leased by financial firms.
What are the most positive aspects of leasing in the Plaza District today?
Post-Lehman … many firms were concerned with the ramifications of being perceived as too opulent. As time has passed, that concern has largely subsided, which is certainly a positive for the health of the Plaza District.
A lot of sublease space that came onto the market after Lehman collapsed was dumped by big financial firms. We know a bunch of it has been leased, but has it fully worked its way through the system?
It has worked its way through. The Midtown sublease availability rate peaked at 5.1 percent in June 2009, with the vast majority of sublease space brought to the market by financial, law, and media-related firms. Today the Midtown sublease availability rate is 2.8 percent, and almost all the quality sublease space has been leased or back-filled.
Evan Margolin
corporate managing director, Studley
How much of a discount off asking rents are tenants getting in the Plaza District right now, and how does that compare to three months ago, six months ago and a year ago?
The discount from asking to taking rents has compressed just a little bit … but the real difference is when you look at the net effective rents where you take into consideration the concessions like the free rent and the build-out allowances. There is a much bigger spread now — though it is hard to say on a percentage basis — than we saw three months, six months or a year ago. On smaller spaces, where for the past two years I would say it was expected that the landlord would do a whole build to suit a tenant, now landlords are claiming that they want to get out of the construction business and just go back to giving a tenant improvement allowance and letting the tenant build the space themselves. We are starting to see that, but not across the board.
We know that hedge funds traditionally have taken the most expensive space in the Plaza District. Are you seeing any change on that front, or any new types of tenants shopping for space in the area?
Hedge fund and boutique financial firms — be it advisory firms or private equity firms — are still the types of companies that are commanding that super-high-end space. Those businesses typically don’t require a tremendous amount of space. As they grow in assets, they don’t necessarily require much more in the way of employees or space. The rent is not material to their profitability; that’s why they are able to pay those high asking rents.
What are the biggest challenges of leasing in the Plaza District today?
There will continue to be challenges leasing up the space in the low or middle part of nondescript buildings that happen to be in the high-rent district. That space exists in lots of different buildings in lots of different areas, and it’s going to be difficult to find tenants that are willing to pay up just to be in the Plaza District.
Can you give us some examples of some recent leases in the Plaza District that illustrate what’s going on in the market there?
I can give you a list of buildings that command, or are announcing, rents north of $100 a square foot: 510 and 590 Madison Avenue; 375 and 450 Park; 712 and 767 Fifth Avenue; 9 West and 152 West 57th Street, and some others. That is compared with just a handful of deals in 2009 and 2010 that had triple-digit rents.
We’ve reported on landlords agreeing to shorter leases during the downturn. Are landlords still willing to negotiate shorter leases for brand-new tenants?
Yes, landlords are still open to shorter-term leases. The landlords’ thinking is that when the short-term lease expires, the market should be better [and] rents should be higher.
We know that a bunch of the subleased space that was put on the market after Lehman collapsed has been leased up, but has it fully worked its way through the system?
A good portion of the sublet supply that came on the market post-September 2008 has been absorbed, and in some cases, it’s been taken off the market where firms anticipate using it for future growth rather than subleasing it. A good portion of the sublet supply that remains on the market since that time is challenged in some way. It’s either a short-term sublease or from a financially challenged sub-landlord or in a building that might have landlord issues.
Anything else you want to add that we didn’t cover?
While it sounds very rosy for landlords, there are definitely still some bargains out there for tenants with needs. While tenants may have missed the absolute bottom of the cycle, there are still opportunities to lease space at 30 percent less than comparable space might have leased in a building at the peak, especially for spaces outside of the Midtown trophy properties.
Robert Emden
executive managing director, Newmark Knight Frank
How much of a discount off asking rents are tenants getting in the Plaza District right now, and how does that compare to three months ago, six months ago and a year ago?
[Asking] prices are up. …There are the “country-club buildings” — of which there are maybe five or six — 9 West 57th, the Seagram Building, Lever House, the GM Building and 667 Madison. … I don’t think there are transactions that have been inked, but … I think that market is approaching $135 to $140. I don’t think that’s been achieved yet, but the asking rent is there. Then there is the market below that, which … depending upon floor height, rents range between the $80s and $120. That’s what we’ve been flirting with of late. There seems to be sufficient activity to warrant those prices today.
How is the Plaza District doing in terms of recovery compared to other high-profile Manhattan submarkets like the Park Avenue corridor and Times Square?
I always say the Plaza District is the last to fall and the first to rise. So it has come back strongly.
What are the most positive aspects of leasing in the Plaza District today?
Absorption. That’s the best sign you could ask for. The volume of leasing activity is up there.
What are the biggest challenges of leasing in the Plaza District today?
Probably the ability to get the right-size space. There is a lack — and it’s becoming a dearth — of good-quality space because tenants are looking to expand.
Steve Morrows
executive vice president, codirector of leasing, RFR Realty
How much of a discount off asking rents are tenants getting in the Plaza District right now, and how does that compare to the recent past?
The discount at the bottom of the recession was up to 35 to 40 percent. Since then prices have dramatically increased. At the peak of the market, prior to the crash, our high point at 375 Park Avenue was $181 a square foot. At the bottom of the market, we were doing deals at $105 a square foot. Now our rent is up to $140.
Can you give us some examples of recent leases in the Plaza District that illustrate what’s going on in the market there?
We are seeing tenants starting to renew early and expand. At 712 Fifth Avenue, there is a 9,000-square-foot deal at $140 a square foot for half the term and $155 a square foot for the second half of a seven-year [deal]. Several deals that have been done in the Seagram Building have all been signed — or are about to be signed — in the $140-a-square-foot range. At the GM Building there was a 9,000-square-foot deal at $127 a square foot, with $5 a foot in [new building installation]. The velocity of deals over $100 has dramatically increased.
Aaron Jodka
manager of U.S. market research, CoStar Group
How much of a discount off asking rents are tenants getting in the Plaza District right now, and how does that compare to the recent past?
Rents certainly fell sharply in the Plaza District during the downturn, with average asking rents declining by 42 percent for all Class A buildings. But rents have been rising for more than a year now, and are now 22 percent above their cyclical low.
We’ve heard the highest asking rent in the district today is $140. Is that right, and are any landlords getting that?
That is right, the highest asking rent for office space is $140-plus a square foot — at 667 Madison Ave. Unfortunately, many landlords are not listing asking rents, making it difficult to decipher which space or spaces are on the market for the highest rate. Meanwhile, space at 660 Madison Avenue is asking up to $135 a square foot.
How is the Plaza District doing in terms of recovery compared to other high-profile Manhattan submarkets?
The Plaza District is far outpacing other high-profile submarkets, particularly Times Square. Times Square is a much smaller submarket, with 37 Class A buildings for a total of about 37.75 million square feet of space. While vacancies have been falling in Times Square for two straight quarters, rents have yet to stabilize. After posting back-to-back quarters of growth in the second and third quarters of 2010, rents have now fallen since in Times Square. As a result, cumulative rent losses have amounted to 65 percent.
We know that hedge funds traditionally have taken the most expensive space in the Plaza District. Are you seeing any change on that front, or any new types of tenants shopping for space in the area?
Nearly half of the leases signed in the past 12 months have been to financial institutions. Historically, these firms make up closer to 30 percent of the market’s occupied space.
What are the most positive aspects of leasing in the Plaza District today?
The most positive aspect of leasing in the Plaza District is simply that there is leasing. Tenant activity has been strong over the past seven to eight quarters. [There was nearly] 8.3 million square feet of Class A leasing from the second quarter of 2009 to the second quarter of 2010. The last time this market posted such strong leasing on an annual basis was the tail end of the tech boom. … That said, one of the leasing challenges in the Plaza District is that after such a torrid start coming out of the downturn, leasing is easing. Leasing remains in line with the submarket’s historical average, but is clearly trending downward. Until more pronounced job growth forces tenants to expand and take on extra space, rather than consolidate or fill empty desks, it would not be surprising to see leasing activity stumble.
What are the most surprising trends in the Plaza District today?
The most surprising trend is the continuation of financial firms choosing to locate here. The submarket was highly exposed to the downturn due to its reliance on finance.
Frank Doyle
vice chairman, Jones Lang LaSalle
What kinds of incentives are landlords in the Plaza District offering to tenants these days?
The market is absolutely tightening, and concession packages are coming down. Over the past 12 to 18 months, concessions have gone from $100-plus a square foot [for tenant improvements], to $75 to $85 a square foot in pre-build turnkeys, to a market today where landlords are offering $50 to $60 [in tenant improvements] and tenants are assuming the balance of the cost needed to build their space. This is especially true in the trophy buildings within the Plaza District.
It looks like vacancy rates in the Plaza District are going down. How does that compare to three months ago, six months and a year ago? And how is it impacting deals?
For the first quarter of 2010, we had a vacancy rate in the Plaza of 14 percent. Six months ago, in September 2010, it was 13.4 percent. Three months ago, in December 2010, it was 12.2 percent, and in the first quarter of 2011 it was 11.9 percent. Obviously the trend is going down.
Dirk Hrobsky
managing director, UGL
How is the Plaza District doing in terms of recovery compared to other high-profile Manhattan submarkets?
I think it’s doing disproportionately better than the rest of the submarkets, and I think it’s not so much because of the real-world economy than the capital economy.
Is the challenge to lease up lower-floor space a problem for landlords?
[The tenants] paying these numbers would rather pay $10 to $20 a square foot more to be higher in the stack because it is a more prominent position in the building. There are certainly incentives to get people to go lower in the building, but again, those lower floors are not moving all that quickly. … Who wants to pay $80 instead of $100 a square foot to look at a brick wall? A lot of these entities would rather buck up and be [on a higher floor].