The Manhattan office leasing market witnessed a substantial amount of activity in 2013. Surprising moves were made as tenants relocated out of traditional submarkets into emerging submarkets throughout the city. Many well-known companies, such as Condé Nast and Jones Day, made big commitments to move from traditional office space in Midtown to Downtown. The low vacancy rate in the Midtown South market forced tenants to look for outside options. Companies such as Nielsen, Shazam Media Services, and Alloy Digital have moved out of the Midtown South market over the past 12 to 18 months. This movement is expected to continue in 2014.
This year started off well. However, anecdotal evidence suggests that many early 2014 transactions were carried over from the end of 2013. From January through end of February, a total of 301 lease transactions were signed amounting to 4.4 million square feet of leased space, as compared to 600 transactions closed in the first quarter of 2013.
The average Class A vacancy rate throughout Manhattan remained between 9 and 10 percent, while Downtown experienced vacancy in the lower double digits mainly due to new construction. Pockets within the Midtown submarket showed diverging dynamics. For example, the Midtown submarket has properties on Park Avenue with single-digit vacancies and positive net absorption while buildings on Third and Sixth avenues have higher vacancies.
2014 rental rates seem to be rising despite the low volume of leasing. The average Class A rents across Manhattan rose to $59 per square foot in February 2014 from $57 per square foot in 2013. This increase in average rental value can be attributed to the rise in rental rates Downtown.
Many companies are attracted to Downtown because of the new developments with state-of-the-art properties, brand-new infrastructure and efficiencies, modern design, mass transit access and proximity for the employee base in Downtown Manhattan, Brooklyn and New Jersey. The PATH train just inaugurated a new platform to WTC now allowing it to handle 160,000 passengers compared to the earlier 100,000 passengers per day.
From January through end of February, the market witnessed 11 deals each with a sale value above $50 million as compared to 14 such deals in first quarter 2013. The average sale value was between $550 to $600 per square foot in 2014 — almost the same as in 2013. In terms of both volume and value of transactions, 90 percent of the deals were in Midtown or Midtown South. The investment activity in 2014 has been predominantly funded by foreign buyers (55 percent), mainly from Singapore and UAE.
Keeping in trend with last year, so far in 2014 there have been four office properties that traded at prices greater than $1,000 per square foot. These notable deals were at 450 Park Avenue, Time Warner Center office condo, a percentage stake sold in 331 Park Avenue South and 114 E 25th Street.
Some industry experts attribute the sluggishness in the market to the weather conditions, but historically New York has always had cold winters. With that being said, Manhattan has not traditionally witnessed a fall in the activity level during the first quarter. As spring approaches, it will be easier to determine if the sluggishness in the market is weather related or if there is some deeper fundamental problem in the economy.
— By Palak Raval, Researcher, Transwestern. This article originally appeared in the March/April 2014 issue of Northeast Real Estate Business magazine.