We We ended 2012 with a “wait-and-see” New York City office market, a predicament common to other cities and commercial real estate sectors across the U.S. With elections, the fiscal cliff and 2012 behind us, we expect 2013 to be a bit of a transition year with moderate growth, but it will still be interesting to observe and be a part of one of the world’s most dynamic markets as Midtown, Midtown South and Downtown evolve and historic developments such as the World Trade Center continue to take shape.
In terms of tenant activity, Midtown South is still the biggest story. Midtown South vacancy closed the year at 7.9 percent, with average asking rents of $49.69 per square foot, while the submarket’s Class A space was 5.2 percent vacant with average asking rates of $62.57 per square foot. With Google and its $2 billion New York City headquarters at 111 Eighth Ave., Midtown South’s Silicon Alley has emerged as the East Coast hot spot for tech and social media tenants that are drawn to the city’s media and financial agglomerations and talent pool.
Though Midtown and Midtown South offer a different vibe and, generally, different types of office inventory, owners in the two submarkets are competing for many of the same end-users, which enables potential tenants to play the two markets against each other. Midtown space tends to be more corporate, with floorplates exceeding 30,000 square feet, whereas most Midtown South buildings are older, smaller and generally have floorplates of 15,000 to 25,000 square feet.
While Midtown might make more sense from an operational efficiency standpoint, Midtown South’s ambiance and connection to hip neighborhoods and areas such as Chelsea, the Meat Packing District and Flatiron, differentiate it in terms of its allure for tech and social media companies and employees. These factors keep Midtown South’s large buildings with large floorplates — 620 Avenue of the Americas, 11 Madison Ave. and 111 Eighth Ave., for example — near full occupancy.
For 2013, we expect Midtown South rents to spike sharply as the area continues to draw technology and social media firms. It’s an ironic twist because tenants that once viewed Midtown South as the low-cost option now seek less expensive space in re-emerging areas such as Downtown and Penn Station/Garment submarket. We’ll also see a continued influx of relatively new property owners willing to speculate on adaptive reuse, similar to Savanna’s redevelopment plans for 249 and 245 West 17th St. We anticipate that Midtown will continue to lose tenants to Midtown South and other, less-costly areas, but, overall Midtown vacancy will remain around 10 percent and rents will increase steadily.
Downtown, the 1 World Trade Center Freedom Tower rises magnificently, as does neighboring 4 World Trade Center, both of which are slated for 2013 completion. With Condé Nast’s nearly 1.2 million-square-foot commitment to 1 World Trade Center, it will be interesting to see if Downtown emerges as a center for media and technology tenants that would accompany the submarket’s traditional finance, insurance and real estate occupiers.
Capital Markets Questions
Two office building sales that were expected to close around the end of 2012 — but did not — may suggest more wait-and-see for 2013. Owners of 11 Madison Avenue and One Worldwide Plaza anticipated their properties would fetch more than $1 billion and $1.5 billion, respectively, but offers fell below expectations, according to media reports, and the properties were pulled off the market. Higher valuations should indicate greater confidence in New York City’s leasing markets, but, an alternative approach by current owners — refinancing, for example — does not suggest a negative outlook. Still, the fact that New York office properties were pulled from the market proves that ownership price expectations remain above what the marketplace is willing to bear.
More than ever, corporate tenants remain mindful of capital expenses and optimized utilization of office space as they shrink per-person space metrics. That said, Manhattan continues to be a global marketplace where people and companies desire to live and operate. Long term, demand seems to outpace supply, and, ultimately, that suggests a healthy 2013 and robust 2014.
— Adam Ardise, senior vice president, Cassidy Turley