Midtown office brokers hunt high and think low. They’re hunting for higher lease rates in a market where about two dozen buildings now routinely fetch $100 a square foot, and thinking about how the current vacancy rate for Class A office space may yet tighten from 5.8 percent and possibly pass the historic low rates of 3 percent during the dot-com boom.
The Real Deal spoke to prominent brokers and got their thoughts on the current Midtown office boom’s winners, losers and avenues to further growth.
Benjamin Friedland
first vice president, CB Richard Ellis
How high will average rents go in Midtown? When will they reach their peak?
It’s tough to tell whether they have reached their peak at this point. The highest deal that’s been signed was $150 a square foot; some in the premier buildings ask $175 a square foot. Thus far, no takers. There’s no sign now that landlords are going to lower their rents. There’s such a paucity of options for tenants.
What is the biggest driver of continued strength in the Midtown office leasing market?
After September 11, companies thought they would disperse themselves to various locations surrounding the city. But they learned that if you want to keep your talent base, you have to keep your offices in New York.
There are still companies that, as a result of higher rents, are in the surrounding suburbs; they have back office space in Brooklyn, New Jersey or Long Island City, but their main operations are still in Manhattan. A lot of large companies are staying in Midtown but they are looking at Downtown as a low-cost option for additional space.
What surprises you most about the current Midtown office market?
It is surprising that law firms are signing leases for over $100 a square foot. For financial services, it’s not surprising.
What submarket in Midtown has capitalized best on the upturn in the market?
The high end. The discrepancy in rents between B+ and A space has never been greater.
How many buildings are seeing $100-per-square-foot rents?
This year to date there have been 24 buildings; in 2005, there were 16; in 2004, there were three; in 2002, there were three; none in 2001; and six in 2000. Deals are now routinely above $100 a square foot.
Is there any particular building that’s surprised you by getting $100 per square foot?
What has been surprising is that 9 West 57th Street, the General Motors Building, and Seagram Building are getting $100 a square foot on the lower floors without the great views.
Mark Miller
founder and president, Miller & Partners
How high will average rents go in Midtown? When will they reach their peak?
They have reached their peak in my opinion. But I also think that properties that may not have taken advantage of the increase in rents in the market and are true Class A or trophy properties will have the opportunity to increase rents on renewal or vacancy — for example, some space in the MetLife building at 200 Park Avenue.
How much farther will vacancy rates go down?
I don’t think it will go lower. There’s too much diversity in lease expiration dates for it to go much lower than it is now.
What is the biggest driver of continued strength in the Midtown office leasing market?
The larger law firms are picking up new groups from law firms that are closing down. The financial services have been the savior of the market since September 11.
What factors could make for a weaker Midtown office market?
Terrorism. I’m not sure there’s anything else that comes to my mind that could do it. A corporate scandal isn’t going to do it. The stock market going down won’t do it. A catastrophe, unfortunately, that shocks the system, that can do it based on flight. There are also nine- to 12-year periods where markets shift. In 2012 or 2013, my crystal ball says we are going to see a significant reduction in rents.
Are tenants being driven out of Midtown by high rents?
Some are. Where they go depends on where their employees come from, but, looking broadly, it’s Downtown, then New Jersey, like Jersey City, Hoboken, Florham Park and Parsippany. Long Island City is getting a head of steam for those tenants of a certain size who need a certain floor plate, and Brooklyn, too. The Bronx had a resurgence recently in the Hutchinson Metro Center. They have leased several hundred thousand feet.
What submarket in Midtown has capitalized best on the market uptick?
Midtown West from 40th to 45th streets and from Fifth to Eighth avenues is the area that has truly surged and grown.
Which submarket has missed out the most?
Midtown South, on the Park Avenue South corridor, missed out partly because there wasn’t a lot available; they weren’t able to get lease velocity for rents to fly up there. The vacancy rate over there is certainly not high but it is still evident that rents have not flown up the way they have elsewhere.
How has the tight market affected broker commissions?
Both good and bad. We make more money as rents go up but we make less when we lose deals because too many tenants are chasing less space.
We recommend to the client or clients asking me to make an offer that we go above the building asking price. There are owners that underprice their space. I had one in June in Times Square and just had another in the Grand Central District. I would say to the client, “let’s bid more.” We ended up bidding $63 a square foot [in rent on one of the deals] and getting the space.
Is there a concern that vacancy levels will create a space crunch that hurts business in New York?
Not that I’ve heard, and I’m in my 25th year in the industry. There are always leases turning over; either the tenant is not renewing or the landlord wants to gut the space. We have over 450 million square feet of office space in the Midtown market with 3 to 6 percent turning over at any point. We will never see the vacancy rate go below that.
Is there a particular building that has seen $100-per-square-foot rent levels that you are most surprised by?
I didn’t expect it to happen at 505 Fifth Avenue [at 42nd Street]. For a Class A property in the Plaza District you would expect that with the views. But to get that price overlooking the New York Public Library or Bryant Park?
David Levy
principal, Adams & Company
What is the biggest driver of continued strength in the Midtown office leasing market?
There has been so much space removed from the market for conversion to hotels and residential. That is commercial property that is never going to come on the market again. It’s made Manhattan smaller for the commercial tenant. It’s a delicate balance to have a solid commercial real estate market and an uncomfortable market where you’re pricing out the people that are supporting the city.
What building owner or commercial developer (not including any you currently work with) has best capitalized on the upturn in the market, and how have they done it?
There are so many people that have made a lot of money in the last five years. Certainly, SL Green has done a good job in marketing their property, but are they the best? I don’t know.
Which submarket has missed out the most on the upturn in the market?
Grand Central maybe missed out the most in Midtown with the Class B older office buildings that have not capitalized as much as other areas.
What industries do you expect the most leasing from going forward?
The theory is that when the law firms expand at incredible rates in size or price or both, that’s a bad sign. They are always a year or two behind the curve. In a year or two, there will be a lot of law firm space and space from other professions like accountants and consulting.
Is there a particular building that has seen $100-per-square-foot rent levels that you didn’t think would get that high and are most surprised by?
The Verizon building at 1095 Avenue of the Americas, which is across from Bryant Park and is not in the Plaza District.
David Hoffman Jr.
principal, Colliers ABR
What submarket in Midtown has capitalized best on the upturn in the market?
The Plaza District reaped the most benefits and that has been widely reported.
Looking at leasing activity, some reports recently said leasing volume is at its highest level since 2002. Do you expect that will moderate or keep rising?
That has to moderate or we are going to run out of space. It can’t continue to be the same volume.
How has the tight market affected broker commissions?
There have been times recently when landlords have begun resisting paying commissions on renewals.
Matthew Astrachan
executive vice president, Cushman & Wakefield
How high will average rents go in Midtown?
When you compare Class A space, the peak in 2000 was $67.40 [a square foot]. Our forecast for next year is $67.47. Vacancy in 2000 was 3.2 percent. We are currently at 5.8 percent. The market can get significantly tighter, thereby rent escalation should continue.
How much farther will vacancy go down?
We are projecting two percentage points. It could hit that point next year, in the fourth quarter of 2007.
What factors could make for a weaker Midtown office market?
A substantial falloff in employment growth. Most lease action now is expansion driven, not lease-expiration driven. Frankly, we have the lowest unemployment in five years in the city, below the national average. I look at the restaurants; they are full all the time. The primary driver in our market is job growth; it always has been and always will be.
What surprises you most about the current Midtown office market?
The consistency of demand for Class A product. There is softer demand for B and C space.
What building owner or commercial developer (not including any you currently work with) has best capitalized on the upturn in the market and how have they done it?
Forest City Ratner with the New York Times building across from the Port Authority. It’s a risky location. They built a very high-quality, efficient building and tenants are willing to take the risk. Also, Equity Office Properties with its purchase of the Verizon building at 1095 Avenue of the Americas.
What submarket in Midtown has capitalized best on the market uptick?
Park Avenue has seen the greatest escalation in rents at $20 a foot for all classes, which is an extraordinary increase.
What industries are not on brokers’ radars yet?
Alternative energy companies will be coming to New York. They don’t need to headquarter here but they need a presence to enhance the understanding of the investment banks. They will be the next dot-coms.
How has the tight market affected broker commissions?
In a tight market, landlords will resist paying brokers on renewal. They don’t want brokers involved, and they are always trying to cut brokers out of that transaction.
Any anecdotes about how tenants have coped with the tight market?
Unfortunately, more landlords are trying to change the deal terms after the handshake. It can take a long time to facilitate the transaction; they will come back and say they want more rent, which some tenants will accept or look for other space.
Will there be more speculative office development ahead? Where would it happen first in Midtown?
SJP Properties’ development across from the Port Authority on 42nd Street is being built on spec [on a speculative basis]. I never thought I’d see that happen. There’s a limited amount of land where office can be developed. The only areas seeing this are the far West Side and the far East Side. I don’t know if the corporate business tenants will accept those areas.
Larry Zuckerman
senior managing director, Grubb & Ellis
How high will average rents go in Midtown? When will they reach their peak?
In my opinion, it will go up another $5 to $7 per square foot over the next 15 to 18 months.
How much farther will vacancy go down?
It looks like another 1 to 2 percent, and it will reach that point around the beginning of 2008. We are all around the same range with our forecasting predictions.
Are tenants being driven out of Midtown by high rents yet, and where are they going?
Obviously, when large blocks of space aren’t in supply, Downtown becomes the beneficiary. We don’t see the effects of that in the outer boroughs yet, not that it won’t happen. Certainly it will happen in Jersey City before Long Island City.
How has the tight market affected broker commissions?
Personally, I think a market in equilibrium is a much healthier environment for us to be working in. The tight market makes it difficult for the young broker that doesn’t have the relationships with the commercial landlords. [Commissions] are higher because they are tied into the rising rental rates.
Is there a particular building that has seen $100-per-square-foot rent levels that you didn’t think would get that high and are most surprised by?
I was very surprised at what was reported in the New York Post, that a hedge fund lease at the Moinian Group’s 1775 Broadway was quoted north of $100 a foot. That would be the one that shocked me the most, assuming that info is correct.
Ken Krasnow
executive vice president and director of tri-state brokerage, Trammell Crow
How high will average rents go in Midtown?
I still think there’s a little more room to go, but I’m starting to see signs of stabilization on the horizon. As we head into next year, the rise and pace of appreciation is going to start to subside.
When will they reach their peak?
We should be peaking sometime next year and stabilize somewhere in the next six to nine months. Right now, it’s a landlord’s market; over the next six to nine months, we will return to a balance of power.
What is the biggest driver of continued strength in the Midtown office leasing market?
Clearly, there are two main industries driving the growth: the financial services and the legal industry. What is starting to be somewhat a concern is how dominant those industries are in driving the market, because whatever could impact those industries clearly impacts on the rest of the market.
What factors could make for a weaker Midtown office market?
For the financial industry, the good news is that they haven’t taken space too far in advance of their needs. Companies in the past were leasing to warehouse space if and when they need it. They haven’t done that. The supply factor will be kept in check. The supply won’t be dumped onto the market.
Which submarket has missed out the most on the upturn in the market?
In the Columbus Circle area, a lot of people had visions that the Time Warner Center and Hearst Building would really spur a sense of demand and action up there. It’s done well; it’s hard to find an area that hasn’t done well, but a lot of people thought it would be taken to the next level. It’s not the hot place to be the way the Times Square and 42nd Street areas are.
Which building stands out for having missed out on the upturn in the market most?
340 Madison, for whatever reason, was never able to capitalize on the demand for large blocks of space it had. The building underwent renovation and has good ownership [Macklowe Properties], but it is still there today when it’s clear the demand for big blocks was voracious.
The economy is expected to weaken, at least nationally, and it doesn’t seem that the city’s economy, while strong, is necessarily quite as red hot as the office market. What is the main factor fueling the hot office market?
Our job picture is healthier than the national economy and that is the prime factor fueling this market.
How many buildings are seeing $100-per-square-foot rents?
Probably 15 to 20 are asking and achieving those numbers, and that is triple what it was a year ago. We won’t see dramatically more a year from today.
Neil Goldmacher
executive vice president and principal, Newmark Knight Frank
How high will average rents go in Midtown?
We show Class A building rents are $65.37 per square foot and, frankly, our instinct is, if this is not the high, it’s pretty close. In this cycle it won’t go much higher. Vacancy may go down a little more but it is close to the top of the market. The peak may have been two months ago or it may be two months from now, not sure. It’s not so easy to tell because it is not like the stock market. We can track who is in the market and what they need, but it is not a totally transparent market.
We are beginning to see larger corporate clients slow the decision-making process because they feel a shift in the economy. It’s not everybody, but an increasingly larger number of clients
What submarket in Midtown has capitalized best on the upturn in the market?
Definitely the Plaza District. The owners in that market saw that there was a lot of high-end tenancy there, moved their price up, and capitalized nicely.
What industries are not on brokers’ radars yet?
I don’t think there are any that aren’t on brokers’ radars. A lot of brokers abandoned the tech sector after the dot-com bust. There has been a resurgence, not to the extent of 1999 to 2000, but best-in-class tech companies will do well in 2006 to 2007. It’s an industry that is not so much on radars only because there was a level of pain that went along with it, but there will be an increase in transactions for those kinds of firms.