Janet Woods, DTZ
New York City is booming. The local economy is the strongest it has ever been, with total employment numbers reaching all-time highs totaling over 4.2 million jobs through May 2015. This has led to a strong office market performance during the first six months of 2015, as office-using employment continues to grow, up 2.5 percent over the past 12 months. Demand for space continues to keep availability below 10 percent, and at 9.6 percent, Manhattan availability is down 50 basis points from last year.
Despite minimal increases in Manhattan overall asking rents, up only 2.9 percent year-over-year through June, some submarkets are exceeding previous record-high asking rents from 2008. The demand from creative and tech tenants looking for space in Midtown South over the past few years has pushed asking rents up 19.1 percent above all-time highs. Downtown overall average asking rents have reached historical highs this year as well, and at $57.78 per square foot, rents are 10.3 percent higher than the previous highs in 2008. Most of this increase can be attributed to new construction at the World Trade Center site. Despite this, Midtown overall asking rents are still 5.3 percent off historical highs from 2008. Throughout Midtown, there are a few submarkets with exceptions to asking rents lagging behind historical highs, including the Fifth/Madison submarket where overall asking rents are over $110 per square foot and 8.2 percent above historical highs.
These rental changes have caused tenants, specifically in the non-profit sector, to be priced out of specific neighborhoods. For instance, a non-profit leasing space in Midtown or Midtown South could likely be faced with a rental increase that’s double its current rate in the same building. Rather than go from a lesser class building in the same neighborhood, tenants have discovered opportunities in other parts of New York City where the quality of the building is the same, but the tenant would only incur a modest increase in rent. In 2013, a trend began where not-for-profit organizations monetized real estate assets in a thriving investment sales market that was fed by surging demand for property by real estate investors. This trend really took off in 2014 and has continued into this year. The sites being sold by non-profit organizations are 61 percent above the Manhattan average due to their location in prime areas, and most of the sites were being purchased for repositioning by developers. In previous sales cycles, not-for-profits were able to sell their buildings at a premium, and then purchase replacement office condos at a lower cost basis. In today’s market, this option is limited as demand for office condominiums is far outpacing the supply, which has driven up pricing for typical relocation sites for this sector and reduced options to a mere handful. This has caused most not-for-profits that sold properties to relocate into long-term leases.
In fact, on average, tenants can lease similar quality Downtown Class B space at a lower price point than Class C Midtown space in some buildings. Midtown Class C buildings average $46.63 per square foot, while Downtown Class B space averages $44.18 per square foot. Tenants priced out of Midtown are also seeking space in Long Island City, which is only a 15 minute subway ride away from the east side of Manhattan, and are signing leases in the $35 to $40 per square foot range.
— By Janet Woods, Executive Managing Director, DTZ. This article originally appeared in the August/September 2015 issue of Northeast Real Estate Business.