Bloomberg: Midtown Manhattan Office Landlords Losing Power to Drive Rents

By David M Levitt on March 11, 2016.

  • Landlords looking to `meet' market after 5 years of increases
  • SL Green, Vornado reduce some rents 10% at Park Avenue tower

    Midtown Manhattan office landlords are losing some power to set rents on their properties, even in the prized Park Avenue corridor, after five years of aggressive price-pushing.

    Tenants at top-quality offices in Midtown paid 7.4 percent less in February than at the end of last year, after a 13.3 percent increase for all of 2015, according to data from research firm CompStak Inc. Landlords including SL Green Realty Corp., Manhattan’s biggest owner of office towers, have lowered asking rents in some of their most desirable buildings. Others are holding the line.

    “With all the market uncertainty, there may be a ‘let’s meet the market’ mentality by landlords,” said Scott Rechler, chief executive officer of RXR Realty LLC, which is keeping rents steady in the nine Midtown skyscrapers it controls. “Whereas last year, it was ‘let’s move the market, let’s lead the market.’”

    Midtown landlords, accustomed to having the upper hand in leases in the largest and costliest U.S. office market, face the prospect of a slowdown in demand amid the stock-market slide, added competition from new skyscrapers, and a sense that the pace of job growth can’t keep up. With cost-conscious employers packing more workers into tighter quarters, it’s time for building owners to lower their sights a bit, said Heidi Learner, chief economist at brokerage Savills Studley Inc.

    “We’re now in year seven of a recovery, and by my calculations, we’ve added some 150,000 office workers” in the city, she said. “It’s been a very robust recovery, but we’re occupying less space. And now we’re pretty certain employment growth is not going to keep to that pace.”

    Not everyone who studies the market shares that view. Richard Persichetti, Northeast research director at Cushman & Wakefield Inc., is among those who say evidence is too scanty to signal a decline and that rents still have room to run.

    “We’re not seeing a softening of demand at all,” Persichetti said. “Some spaces have had price adjustments down, but that is typical,” while landlords have been raising asking rents on other offices.

    About 2.7 million square feet (251,000 square meters) of Midtown offices were leased in the first two months of the year, more than the 15-year average of 2.5 million square feet, Cushman data show. Asking rents -- what landlords seek before negotiations with tenants -- rose 2 percent from the end of 2015, according to the brokerage.

    CompStak’s data paint a different picture of the market this year. Taking rent -- what tenants agreed to pay after any landlord concessions, such as free-rent periods and allowances for space upgrades -- fell to $78.19 a square foot on average in February, from $84.44 at the end of 2015, according to the research firm. Starting rent, the amount without incentives, dropped 6.1 percent to $81.63 a square foot.

    “The pullback in rents is not very surprising, given the overall volatility in the domestic financial markets, as well as questions around growth in China,” Blake Toline, a CompStak research analyst, said in an e-mail. The end of the first quarter “will have to be very strong for the quarter-over-quarter growth rate not to be negative.”

    280 Park

    SL Green and Vornado Realty Trust, co-owners of 280 Park Ave., recently lowered asking rents more than 10 percent for space on the middle floors of the 43-story tower, to $95 to $99 a square foot, according to a person with knowledge of the prices. A space on a lower floor was trimmed to $88 from $95, while an office on the 40th floor was reduced to $135 a square foot from $140, said the person, who asked not to be named because the information is private.

    Steven Durels, SL Green’s director of leasing, called the figures “fairly accurate.” He said the cuts reflect nothing more than what’s right for the particular property and that the prices are still among the highest anywhere in the U.S.

    “We didn’t reduce every space in the building,” Durels said. “We had a handful of spaces where, in all honestly, we were probably priced heavy for the market, and adjusted accordingly.”

    A spokeswoman for Vornado, Wendi Kopsick, declined to comment.

    SL Green also dropped asking rents at 10 East 53rd St. to $100 a square foot from $110 on an upper floor and to $90 from $95 on a middle floor, Durels said. At another of the landlord’s prime buildings, 1350 Avenue of the Americas, rent for the 27th floor was cut to $87 a square foot from $92.

    ‘Extremely Robust’

    Across all of SL Green’s properties, “leasing velocity is extremely robust” and on pace to exceed its fourth-quarter total, Durels said. He said the company has raised rents at the Graybar Building, adjacent to Grand Central Terminal.

    While reductions haven’t been large, they reflect “a change of sentiment on the part of landlords,” said Learner of Savills Studley. “We would never say there’s widespread panic going on.”

    Gerard Nocera, principal at Herald Square Properties LLC and a former chief operating officer at SL Green, said his company reduced what it’s asking on certain floors of 292 Madison Ave. to $65 a square foot, down from $67 -- a tweak after overshooting the mark with a rent increase at the building about six months prior.

    “The smarter owners will never hold out for the last dollar,” said Nocera, whose firm owns or manages more than 1 million square feet of Manhattan offices. “They want to be priced right and they want to lease their space. In order to do that, you have to have the courage not only to lead as the market is going up, but you also have to have the courage to lead as the market is going down.”