Go to Plaza District statistics
Rampant rent growth characterized the city’s commercial climate for the past three years, but office rent increases have not risen uniformly among Manhattan’s submarkets.
The Plaza District — defined by research firm CoStar as the area between 47th and 65th streets, from Park to Sixth avenues — has seen the steepest increases.
The rent cycle peaked in the first quarter, and brokers say Plaza area office space, as the submarket that’s seen the greatest boost, may also have the farthest to fall as the market recedes. The area, they say, is particularly vulnerable to the Wall Street meltdown because of the large number of financial service tenants who are reeling from last month’s massive upheaval.
After its combination bankruptcy filing and acquisition by the British bank Barclays, Lehman Brothers could see some of its space come on the market for sublease. Barclays is in the process of determining how many of Lehman’s 10,000 employees to keep. Lehman had space at 399 Park Avenue, on the eastern edge of the Plaza District, which it had been looking to parcel out to subtenants before the firm imploded. It is unclear what will happen to Lehman’s space at 31 West 52nd Street, 1271 Sixth Avenue and 1301 Sixth Avenue.
Meanwhile, Merrill Lynch, bought up by Bank of America last month for $50 billion in stock, could shed thousands of employees in the coming months as well. In the Plaza District, Merrill has offices at 717 and 650 Fifth Avenue, 1251 Sixth Avenue and 1 Rockefeller Plaza.
The average asking rent for Class A office space in the submarket was $109.46 per square foot in August 2008, the most recent data available at press time. That was up 34.6 percent from $81.33 per square foot in August 2006 and up 60.1 percent from $68.38 per square foot in August 2005.
Some brokers remain bullish on the area, pointing out that even with 20 to 50 percent price corrections in the district’s most expensive office towers, rents would still remain above where they were three years ago.
The area is also protected by a limited amount of new construction coming online, which will help keep vacancy rates down, according to Robert Emden, principal at PBS Real Estate. This contrasts with the market’s last downturn, beginning in 2001, when new office supply in the Plaza District was contemporaneous with a leasing slowdown.
The price corrections predicted for the neighborhood may not hit every part of the district equally, but they could get worse given the way the financial service sector has been rocked, brokers said. Still, some of those working in the area report only a mild slowdown, if any, when it comes to smaller offices and very high-priced spaces.
Leasing activity for small spaces there, especially ones 20,000 square feet and smaller, is aided by branch offices of international companies and small investment firms drawn to the cachet of the district, said Mike Kaufman, managing director at the Kaufman Organization.
“There’s still been a lot of interest for smaller spaces [in the area],” said Kaufman. “But if you’re looking to get rid of over 100,000 square feet, that’s a whole different customer.”
While Lehman’s 167,000-square-foot space at 399 Park Avenue is the district’s biggest block of sublease space on the market, there is also an 80,000-square-foot space available at 590 Madison Avenue and a 67,000-square-foot space at 625 Madison Avenue. Rumors also abound that Bank of America will begin shopping around its 600,000 square feet of offices at 9 West 57th Street as its workers move into the new tower at One Bryant Park.
There is a possibility that the large spaces that come to market will eventually be divided into smaller offices for multiple tenants. But brokers who spoke to The Real Deal said that in general, landlords consider it an option of last resort.
“If a space is already set up for a big tenant, it’s going to take a lot of work to make it work for several smaller companies, and the landlord would likely have to upgrade some of the floors,” said Alan Bonnet, senior managing director of Adams & Co.
“But if after a point they cannot dispose of the space in a reasonable time frame, they may decide that they have to chop it up into smaller units,” he said.
John Johnson, senior managing director at Studley, said he believes there are few enough large spaces available in the Plaza District that landlords could likely extract high prices for them once a tenant is found. Although they may move slowly, he said, a landlord would be wise to keep it as a large continuous space because of the relative rarity of that asset now.
Brokers say that the highest-quality Class A space will be especially resilient
to rent corrections, as demand in that price range is relatively impervious to market conditions.
Kaufman said that at the highest price range of the Plaza District, rents might be dropping from $200 to $175 per square foot. This represents a 12.5 percent decrease — well below the 40 percent Class A rent growth from two years ago.
“Those who want to be in these types of assets are going to pay what they have to [in order to] be there,” said Matthew Astrachan, executive vice president at Cushman & Wakefield. “And the difference of $5 or $10 per square foot is just a trade for them. It’s not even a decimal point.”