Manhattan Office Market Enjoys Best Year Since Financial Crisis - World Property Journal

By: Michael Gerrity | World Property Journal

According to JLL, Manhattan's office market recorded its strongest year since the financial crisis, posting steep declines in vacancy, positive absorption and a 10-year high in new large block leasing activity by year-end 2014.

JLL reports the major themes for the year included the migration of large tenants to Lower Manhattan, record leasing activity in Midtown South and the continued rise of Midtown's Trophy properties as both international investors and tenants take interest.

Manhattan's overall vacancy rate dropped to 9.5 percent this quarter, a decrease of 2.1 percent (or 0.2 percentage points) from 9.7 percent in the third quarter of 2014 and 14.4 percent (or 1.6 percentage points) from 11.1 percent at year-end 2013. The Class A vacancy rate declined to 10.5 percent in the final quarter of the year, a decrease of less than 1.0 percent from 10.6 percent in the third quarter of 2014. New York's Class A vacancy rate dropped 13.2 percent (or 1.6 percentage points) from 12.1 percent at year-end 2013.

"The outlook for the financial services sector -- historically a key driver in terms of the city's Class A office leasing activity -- is improving," said Tristan Ashby, Director of New York research. "While the industry has not yet recovered all the jobs lost since the recession, the sector posted noticeable year-over-year employment gains throughout 2014. Despite increased regulation, the uptick in financial services employment is forecast to continue, as lingering reluctance to expand hiring wanes in light of improving economic indicators. Sustained employment growth in the sector would have an outsized effect on the Manhattan office market and future leasing activity."

Overall average asking rents in New York rose to $65.25 per square foot this quarter, an increase of less than one percent from $64.91 per square foot in the third quarter of 2014. The city's overall rates grew 5.6 percent over the past 12 months from $61.81 per square foot at year-end 2013. Class A average asking rents remained almost unchanged from the previous quarter at $71.68 per square foot. Manhattan's Class A rates rose 4.1 percent over the past 12 months from 68.83 per square foot at year-end 2013.

Midtown South

After benefitting from record leasing activity in the first half of the year, Midtown South saw deal volume cool during the fourth quarter of 2014, as space options declined and asking rents remained elevated. In the largest lease of the quarter and the second largest Midtown South transaction of the year, the Drug Enforcement Agency renewed its lease at 99 Tenth Avenue for 570,000 square feet. Elsewhere, BuzzFeed Inc. took six floors, totaling 194,123 square feet, at 225 Park Avenue South in Gramercy Park.

Midtown South's overall vacancy rate rose to 6.9 percent in the fourth quarter, an increase of 3.0 percent (or 0.2 percentage points) from 6.7 percent in the third quarter of 2014. The submarket's overall vacancy rate fell 17.9 percent (or 1.5 percentage points) over the past 12 months from 8.4 percent at year-end 2013. The Class A vacancy rate dropped to 3.9 percent in the final quarter of the year, a decrease of 4.9 percent (or 0.2 percentage points) from 4.1 percent in the third quarter of 2014 and 36.1 percent (or 2.2 percentage points) from 6.1 percent at year-end 2013.

Average asking rents in Midtown South ticked higher this quarter, largely the result of high-price space added back to the market. Overall average asking rents in Midtown South rose to $60.78 per square foot by the end of December, an increase of 3.3 percent from $58.83 per square foot in the third quarter of 2014. The submarket's overall rates grew 5.0 percent over the past 12 months from $57.88 per square foot at year-end 2013. Class A average asking rents rose to $71.15 per square foot in the final quarter of the year, an increase of less than one percent from $70.94 per square foot in the third quarter of 2014. Midtown South's Class A rates dropped 4.6 percent over the past 12 months from $74.58 per square foot at year-end 2013.

Midtown

Financial and legal services -- the traditional drivers of leasing activity in Midtown -- accounted for six of the top 10 leases in 2014, compared with just three in 2013. Online retailer Amazon.com Inc. signed the largest deal of the fourth quarter in the submarket -- a 470,000-square-foot lease for the entire 7 West 34th Street. In addition, Kirkland & Ellis renewed 390,000 square feet at 601 Lexington Avenue, Schulte Roth & Zabel LLP signed a renewal for 282,102 square feet at 919 Third Avenue, The Bank of Tokyo-Mitsubishi UFJ/MUFG Union Bank inked a new lease for 209,710 square feet at 1221 Avenue of the Americas, and TD Bank, N.A. committed to anchor One Vanderbilt, the 1.6-million-square-foot office tower planned for the block to the west of Grand Central Terminal.

When combined with minimal new availabilities, this and other activity remained strong enough to drive Midtown's overall vacancy rates and Class A vacancy rates to their lowest level since 2008. Midtown's overall vacancy rate fell to 9.7 percent this quarter, a decrease of 4.0 percent (or 0.4 percentage points) from 10.1 percent in the third quarter of 2014 and 12.6 percent (or 1.4 percentage points) from 11.1 percent at year-end 2013. The Class A vacancy rate fell to 10.7 percent in the final quarter of the year, a decrease of 2.7 percent (or 0.3 percentage points) from 11.0 percent in the third quarter of 2014 and 8.5 percent (or 1.0 percentage point) from 11.7 percent at year-end 2013.

Despite the heavy activity, Midtown broke a 17-quarter-long streak of consecutive increases in Class A rents in the fourth quarter of 2014. Asking rent growth was the greatest in buildings at the top of the market. Plaza District Trophy asking rents broke $100 per square foot during the fourth quarter for the first time since 2008.

Overall average asking rents in Midtown remained nearly unchanged at $70.31 per square foot this quarter. The submarket's overall rates grew 3.9 percent over the past 12 months from $67.65 per square foot at year-end 2013. Class A average asking rents in December remained nearly unchanged from the third quarter at $77.11 per square foot, but rose 2.3 percent from $75.38 per square foot at year-end 2013.

Downtown

Downtown benefited from the continued diversification of its tenant mix as the top 10 relocations from elsewhere in Manhattan were by nontraditional tenants, including fashion label Hugo Boss. OSP Group, an online apparel retailer, signed the only large lease of the fourth quarter when it agreed to move from two Midtown locations into 157,210 square feet at 1 New York Plaza. IPsoft signed the second-largest deal of the quarter when it renewed and expanded to 97,955 square feet at 17 State Street. Other significant transactions included High 5 Games' 87,663-square-foot lease at 1 World Trade Center and Hugo Boss' 73,690-square-foot lease at 55 Water Street.

These moderately sized transactions somewhat offset deliveries of large blocks of space at 1 Liberty Plaza and 1 State Street, which resulted in a slight uptick in overall vacancy rates in the final quarter of the year. The submarket's Class B properties, however, continued to benefit from discounted pricing, resulting in a vacancy rate of 8.9 percent -- the lowest recorded in the past 55 quarters. Looking forward, Downtown is expected to see a near-term jump in vacancy rates due to impending large blocks of available space at 28 Liberty Street, formerly known as 1 Chase Manhattan Plaza, and 300 Vesey Street in the first quarter of 2015. On the positive side, increases in average asking rental rates are also anticipated to accelerate.

Downtown's overall vacancy rate rose to 10.7 percent this quarter, an increase of less than 1.0 percent from 10.6 percent in the third quarter of 2014. These late-year elevations, however, did not significantly impact year-to-year results, as the submarket's overall vacancy rate fell 15.7 percent (or 2.0 percentage points) over the past 12 months from 12.7 percent at year-end 2013. The Class A vacancy rate rose to 11.6 percent in the final quarter of the year, an increase of 3.6 percent (or 0.4 percentage points) from 11.2 percent in the third quarter of 2014, but dropped 18.9 percent (or 2.7 percentage point) from 14.3 percent at year-end 2013.

Overall average asking rents Downtown rose 2.5 percent to $54.43 per square foot in the fourth quarter from $53.12 per square foot in the third quarter of 2014 and 8.4 percent over the past 12 months from $50.19 per square foot at year-end 2013. Class A average asking rents rose to $58.60 per square foot in the final quarter of the year, an increase of 1.6 percent from $57.66 per square foot in the third quarter of 2014. Lower Manhattan's Class A rates rose 7.0 percent over the past 12 months from $54.77 per square foot at year-end 2013.

News: 01.22.2015