Faltering in Flatiron office market

<i> Submarket around iconic building has among highest vacancy rates in Manhattan</i>

On paper, at least, the Flatiron District would appear to possess all the trappings of a bustling, mixed-use area for commercial real estate: Centrally located (check); moderately priced (check); good restaurants and sophisticated architecture (check and check).

But at just over 19 percent, the district also boasts one of the highest office availability rates (which measures the percentage of space that is available for lease, or will be available within the next 12 months) in Manhattan. And real estate experts are grasping for explanations.

According to a report by the commercial brokerage CB Richard Ellis, the availability rate in the Flatiron District climbed 0.2 points in August to 19.3 percent. In comparison, the neighboring districts of Chelsea and Union Square had rates of just 11.6 percent and 10 percent.

In addition, the district had just 25,000 square feet of total leasing activity in August, down 44 percent from the area’s average of 45,000 square feet.

Despite those bleak numbers, Sloane Rhulen, first vice president at CBRE, said the long-term prospects for the Flatiron District remain bright. “I think there are a lot of pending lease expirations and there are still good deals to be had,” she said.

Rhulen declined to disclose details on any of the lease expirations she was tracking.

Considered part of Midtown South, the borders of the Flatiron District are a bit vague but are generally considered to run from 14th Street to the south, Sixth Avenue to the west, 28th Street to the north and Park Avenue South to the east.

Combined, the district has a total 10.4 million square feet of space, according to CBRE.

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Perhaps the biggest change to the Flatiron area occurred two years ago, when L & L Holding Company acquired the Toy Center at 200 Fifth Avenue.

The firm recently completed a massive interior renovation and is awaiting the arrival of Grey Advertising, which is moving into its new, 350,000-square-foot office this fall, as a watershed moment for the district. But while that is a significant amount of space, L & L is still seeking tenants for an additional 350,000 square feet of available space in the building.

That, coupled with over 500,000 square feet available at 63 Madison Avenue, and over 100,000 square feet of combined available space at 160 and 150 Fifth Avenue, 28 West 23rd Street and 360 Park Avenue, show how just a few large vacancies can create a giant pool of space.

“We are primarily talking about a market with relatively small buildings, and so when you have a small market segment, which the Flatiron is, a big block of space will whack the sense out of the [vacancy] number,” said L & L Holding Company’s David Berkey.

Indeed, some brokers say a few buildings with large amounts of vacant space are artificially inflating the numbers.

Others say the high availability rate in the Flatiron District — which over the past decade has become home to a broad array of design, architecture, Internet and other smaller creative-type companies — is just a function of the economic downturn. They say that buildings in the district are structurally suited for smaller businesses, many of which are more severely afflicted by economic forces. They also note that the area may have been particularly upended because the downturn hit when the district was in the middle of a transformation of sorts.

Jane Gural Sender — an executive director at Newmark Knight Frank who oversees leasing at 230 Fifth Avenue, 206 Fifth Avenue and the iconic Flatiron Building at 175 Fifth Avenue — said the recession stalled a transformation that she said started about six years ago when a number of developers attempted to convert the district’s showroom space into residential and traditional office space. She cited the conversion of showroom space at 200, 225 and 261 Fifth Avenue over the past several years as prime examples.

“This district is in a transition,” Sender said. The hope of many brokers and landlords, of course, is that the availability rates will fall and the Flatiron District will come out of that transition for the better sometime soon.