| NEW YORK CITY
SHOWS ITS RESILIENCY
commercial real estate market in Manhattan has demonstrated
its resiliency over the past 3 years by staving off a recession,
overcoming the impact of terrorist attacks in 2001 and avoiding
sweeping job losses. In fact, throughout the down cycle, office
vacancies in New York remained in far better shape than the
national average for central business districts. And while
vacancies did rise significantly, relative to the late 1990s,
the investment sales market stayed strong and set records
for prices achieved. All the while, the retail market remained
attractive to both domestic and international retailers.
After Manhattan vacancies leveled off and held steady for
the last three quarters in 2003 at 12.5 percent, vacancies
fell to 12.2 percent at the end of the first quarter 2004,
led by the strongest new leasing activity in more than 2 years
and a significant reduction in sublease space throughout Manhattan.
This is the most significant demonstration of Manhattans
resiliency, and the clearest sign to date that the office
market is recovering and even improving. Overall vacancies
declined 0.1 percent from the end of the first quarter of
2003 to first quarter 2004.
The improvements can be attributed to an improving economy
and a perceived bottom in the market from prospective tenants.
There has been moderate economic growth from a variety of
industry sectors. Add that to an equation in New York City
where a tremendous opportunity exists in the sublease market,
and it becomes clear that decision-makers are using a positive
economic outlook to take advantage of sublease opportunities
while they can.
New leasing activity for the first quarter of 2004, which
represented the most square footage leased during any 3-month
period over the last 2 years, totaled 7.7 million square feet
compared to 5.8 million square feet during the first quarter
of 2003. Leasing has been led by legal, financial services,
accounting and insurance firms.
The most significant vacancy declines continued to occur in
the sublease market. Overall sublease vacancies declined to
3.1 percent at the end of the first quarter of 2004, from
4.1 at the end of first quarter 2003. Some of the biggest
factors in the recovery have been a reduction in sublease
space availabilities and improved business confidence and
profitability, which have in turn resulted in significant
gains in leasing activity.
In 2001, sublease space comprised 37 percent of all available
space in Manhattan and as much as 45 percent of all available
space Downtown. It now represents 25 percent of available
space in Manhattan and only 18 percent Downtown. Major sublease
transactions closed this year have included PricewaterhouseCoopers
for 789,248 square feet at 300 Madison Avenue, Cadwalader
Wickersham & Taft for 364,742 square feet at One World
Financial Center, and Kramer Levin Naftalis & Frankel
for 231,395 square feet at 1177 Avenue of the Americas.
For the quarter ending March 31, all three Manhattan markets
experienced declines in overall vacancy rates. Downtowns
vacancy decline was most significant, falling from 13.5 percent
to 12.9 percent. Midtown South dropped from 13.3 percent to
13 percent, and Midtown declined from 11.9 percent to 11.8
The average asking rental rate continued to decline in Manhattan
overall, to $40.06 per square foot at the end of the quarter
from $40.53 at the end of 2003, due largely to a significant
decline in Downtown Manhattans rents. Downtown rents
dropped from $36.92 per square foot to an average of $33.68
during the quarter. Rents in Midtown and Midtown South experienced
increases, from $30.37 per square foot to $31.04 in Midtown
South, and from $45.37 to $45.61 in Midtown helping
further to fuel the perception that the market has bottomed.
One important caveat to keep in mind is that the increase
in leasing activity was due in part to a significant number
of large leasing transactions in the first quarter that had
been in the works since 2003.
In addition to the large subleases mentioned for PricewaterhouseCoopers,
Cadwalader Wickersham & Taft and Kramer Levin Naftalis
& Frankel, other large transactions included Fairchild
Publications at 750 Third Avenue (234,006 square feet), Gulf
Insurance at One State Street Plaza (108,120 square feet)
and Morgan & Finnegan at Three World Financial Center
(104,226 square feet).
On the investment side of the market, available product is
limited but investor appetite remains voracious. A premium
is being paid for well-stabilized class-A buildings where
average prices are now approaching $400 per square foot.
Almost $10 billion in investment sales activity occurred in
Manhattan in 2003, driven mainly by historic lows in interest
rates and aggressive loan-to-value ratios. The pace has continued
so far in 2004. Even incremental interest rate increases,
which are projected for sometime in 2004, are not expected
to hold back demand as the prospects for improvements in the
leasing market are starting to take shape.
Another area of interest in the investment sales market, particularly
in Lower Manhattan, is the growing number of office building
purchases made with the intention for residential conversions.
Completed conversions downtown in 2003 totaled approximately
500,000 square feet and other buildings slated for conversion
Downtown total more than 2 million square feet. Almost 5,500
residential units have been completed with another 15,000
scheduled to be completed by 2008.
As more older office inventory is removed from the market
and is converted to residential, several important things
will happen. Vacancy rates will be kept in check. Newer, more
efficient office space will be developed and have better prospects
for leasing. And the area will move towards a more sustainable
24/7 community, which is necessary for the long-term vibrancy
of the Downtown office market.
In addition to demand for existing product, real estate developers
are busy implementing plans for new projects in Manhattan.
In 2004 alone, the market is expected to add 4.3 million square
feet of new office inventory. The properties, some completed
and some expected to be completed by years end, include
Times Square Tower at 7 Times Square, Columbus Center, 731
Lexington Avenue and 300 Madison. Even this new delivery of
office inventory has not tipped the vacancy forecast scales
into negative territory. The reason is because of a substantial
amount of pre-leasing. Of the four projects just mentioned,
nearly 75 percent of the space is pre-leased. An additional
25 percent of that space is close to being leased within the
Thats a strong start for these projects. Given the lack
of new, large blocks of available space, and overall economic
improvement, the market is expected to handle the added inventory.
On the horizon, new projects expected to be completed over
the next few years include 8 Times Square, One Bryant Park,
Seven World Trade Center and 959 Eighth Avenue. These buildings
will constitute about 6 million square feet, of which about
half is already pre-leased.
Another segment of the market that has continued to have its
hot spots is retail real estate. New York City is home to
the retail capital of the world, 57th Street and
Fifth Avenue, where retailers take on the most expensive rents
anywhere in the world in order to have a presence.
This allure is a major factor in New York Citys continued
retail success. While the luxury market continues to remain
strong from both domestic and international retailers, one
of the biggest new trends is the proliferation of retail bank
branches throughout Manhattan.
In a race to aggregate assets, every corner of Manhattan retail
space has been deemed a prime location for banks. In fact,
even some luxury brands are closing their doors and making
room for banks. Rolls-Royce, for one, recently relocated a
Madison Avenue location where banking powerhouse Wachovia
is about to open a large branch.
Another trend, with perhaps more potentially significant implications
for the long term, is the entrance of big box retailers into
the Manhattan market. The Home Depot has announced plans for
multiple locations, and its anticipated success has many retail
brokerage professionals expecting leasing activity and interest
from other big boxes in Manhattan and the other boroughs.
If this trend materializes, it will mean much larger retail
leases, and retail space will play a much more significant
role in Manhattans buildings from an investment perspective,
as landlords make room to accommodate the needs of the larger
Ken Krasnow is executive managing director and New York
area leader with Cushman & Wakefield.
|NYC Apartment Investment
Market Remains Hot
Prior to 2001, apartment concessions were unheard of
in Manhattan. Now, however, concessions are prevalent
throughout the borough. Effective rents are currently
4.5 percent below asking rents, as compared with 4.8
percent nationwide, 4.1 percent in Los Angeles and 4.6
percent in both Washington, D.C., and Philadelphia.
Within Manhattan, concessions are highest in Midtown
West, where new construction has been centered over
the past few years and vacancy has increased as a result.
Building managers in more-established neighborhoods
where construction has been limited, such as Stuyvesant
and the West Village, are holding the line on concessions.
Owners can expect concessions to persist into 2005.
Over the next 12 to 24 months, however, rental market
fundamentals will recover as job creation accelerates
and interest rates rise, putting a damper on new construction
and the flight to homeownership.
Manhattans apartment fundamentals will register
limited improvement in 2004 as a result of a recent
buildup in construction and lackluster employment growth.
While developers will complete 3,190 units in 2004,
a 20 percent decline from the previous year and the
lowest total in many years, there is still a high number
of vacant units on the market. Half of the new units
coming on line will be in the Midtown West submarket.
This area is attractive to investors due to high rents
and burgeoning employment growth as financial firms,
such as Lehman Brothers, relocate from the Wall Street
Vacancy in Manhattan will inch up 20 basis points to
reach 4.7 percent by year-end 2004. While this level
is considerably lower than the national mean of 6.7
percent, it is high by Manhattan standards, where vacancy
averaged 1.8 percent for two decades prior to 2001.
Since then, employment loss and a fervent tempo of construction
have pushed vacancy rates to new heights. We expect
vacancy to remain relatively flat for at least the foreseeable
At an average of $2,900 per month, Manhattans
asking rents are the highest in the country. Average
asking rents on the Upper West Side are more than $3,400
and are nearly $3,100 on the Upper East Side. Morningside
Heights/Washington Heights is the only submarket in
the city with rents below $2,700. New York rents are
still below what they were in 2000 and 2001. Citywide,
effective rents are now 4.5 percent less than asking
rents. The offering of concessions is an unusual scenario
and very different from the late 1990s when they were
rarely, if ever, given. The value of concessions in
Midtown West and the Upper East Side has now reached
1 month to 2 months of free rent.
Strong investor demand will continue to support price
appreciation in the Manhattan apartment market. The
median price per unit increased 9 percent, to $119,000,
in 2003, surpassing peaks last seen in 2000. Values
are projected to rise another 5 percent to 8 percent
in 2004. Sellers are taking advantage of strong demand
due to current low interest rates to engage in profit
taking. Investors who already own apartment properties
tend to purchase additional multifamily units in Manhattan.
Small to medium-sized properties in prime locations
are expected to continue posting cap rates at or below
Mitchell R. LaBar is a managing director
at Marcus & Millichap and regional manager of the
firms Northeast operations.
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