By Adam Pincus on January 02, 2015.
An office neighborhood does not change its character suddenly.
Even as technology firms in recent years snapped up many of the new spaces in Midtown South and rents escalated in the area’s core, a cohort of older tenants were protected by distant lease expirations. But as the bull market extends and leases continue to roll, changes to the nature of the neighborhood are deepening.
Last month, The Real Deal reported that The Nation, the nearly 150-year-old left-leaning magazine, will likely have to move from its offices at 33 Irving Place once its lease expires in fall 2016, because of the enormous leap in asking rents in the neighborhood. Prices rose more than 5 percent in the last quarter of 2014 alone.
“The prices in this neighborhood are getting pretty prohibitive,” Teresa Stack, president of the magazine, told TRD. The company, which has been at Irving Place since 1998, expects to relocate, possibly to Lower Manhattan, where rents are more affordable.
The Nation may have company.
“There is an interesting story line for next year,” Peter Hennessy, president of the tri-state region for Cassidy Turley, said in an interview in the final weeks of 2014. “In the Midtown South area, there are a whole lot of tenants that are being priced out that have been there for years.”
Paul Wolf, co-president of Denham Wolf Real Estate Services, noted, “The businesses that are not huge money makers have to leave,” because in most cases they can’t pay the new, much higher rents.
Overall asking rents in Manhattan rose in the fourth quarter of 2014 by 55 cents per square foot to $66.52 per square foot, preliminary figures from the commercial firm Colliers International showed. That was up 10 percent compared with the last quarter of 2013 when they were $60.46 per foot. The availability rate, which measures space that is vacant or will be available over the next year, declined by 0.2 points last quarter to 10 percent. That was down from 11.7 percent at the end of 2013, according to the Colliers data.
Another general trend that is expected to gain steam this year is the expansion of co-working spaces, brokers said.
WeWork, recently valued at $5 billion, has grabbed the most headlines, but there are many others, including Regus and Jay Suites, and they continue to be voracious competitors for office space.
Wolf, who is representing about 36,000 square feet of sublease space on the 12th and 14th floors of 360 Madison Avenue, a 360,000-square-foot building at the corner of 45th Street, said he received offers from four co-working firms to lease the space.
“Co-working [tenants] get excited about it,” he said. Wolf said asking rents ranged from the $60s to the $70s per foot, depending on the details worked out to build out the space.
Hennessy said he expected 2015 would be a good year for Midtown East, which has struggled somewhat in the last year.
“The pricing pressure continues in Midtown South and continues in Lower Manhattan, and that will bode will for Midtown East,” Hennessy said.
Several large blocks of sublease space hit the Midtown market last quarter, driving down the asking rent and increasing the availability rate, the Colliers data revealed. The average asking rent declined by 96 cents in the fourth quarter to $74.78 per square foot. But over the last year, the asking rent was up about 7 percent. The availability rate rose by 0.1 point to 10.7 percent in the fourth quarter, according to Colliers.
The Nation is expecting to move to a new location after its lease expires in 2016 because asking rents at its current building, 33 Irving Place, at the corner of 16th Street, are $63 per foot, far higher than its current rent.
“A lot of publishers are moving Downtown. That is where the affordable deals are,” Stack said. The magazine is being advised by Cassidy Turley’s Susan Kahaner and Jennifer Ogden.
The asking rent at 33 Irving was close to the average asking rent for the market, which rose sharply last quarter to $61.50 per foot. That was up $3.31 per foot over the third quarter, and up more than $6 per foot over the last year, Colliers figures show.
Yet the asking rents are even steeper in some Midtown South buildings. Two floors at 675 Sixth Avenue hit the market last month for $85 per square foot, a listing on CoStar revealed.
Adding potentially more upward pressure on rents, in the fourth quarter, the availability rate declined sharply by 0.6 points to 7.9 percent, Colliers statistics said. The market tightened because of several large deals, such as the Internet publisher BuzzFeed taking 194,000 square feet at 225 Park Avenue South.
Brokers are chipping away at one of the largest blocks of office space to remain on the market for years in Lower Manhattan, at MetLife’s 85 Broad Street. The 1.1 million-square-foot tower between South William and Pearl streets has more than 500,000 square feet listed as available in CoStar.
Yet there are several new leases in the building. One significant tenant is the academic organization the Modern Language Association, which recently signed a 20-year lease for about 38,000 square feet on a lower floor of the building, information from the leasing database CompStak showed. The group’s rent starts in the high $30s per square foot, according to CompStak.
A JLL leasing team of Peter Riguardi, Cynthia Wasserberger and Frank Doyle represented the building, according to CoStar. Neither the association nor JLL responded by press time to a request for comment.
Looking ahead, Hennessy said some new buildings in the market will compete with 85 Broad and towers along Water Street.
“I think Chase Manhattan Plaza is a great product and if [the landlord] Fosun [International] works hard and is ready to make deals, it will pose a challenge for other product that is available,” Hennessy said.
The Modern Language Association’s rent was below the market’s average asking rent last quarter, which was $52.23 per square foot. That is up by 53 cents per foot from the third quarter and up more than 7 percent over the last year, Colliers data showed.
The availability rate Downtown fell sharply last quarter to 11.7, percent, compared with 12.2 percent in the third quarter. The drop over the past year was the most dramatic of the three markets. The rate fell 3.9 percentage points, Colliers data show.
“Overall asking rents continued to climb as leasing was healthy and availability rates further declined,” said Joseph Harbert, president of the Eastern Region for Colliers. TRD