MARKET HIGHLIGHT, JULY 2005

NEW YORK CITY MARKET HIGHLIGHT

Retail Market

It is no surprise that the retail market in New York City has continued to perform well. So far in 2005, activity has been on par with 2004. As always, Manhattan boasts some of the highest rental rates and lowest vacancies in the world, and leasing activity has remained strong in the prime retail corridors, says Michael O’Neill, an associate with Cushman & Wakefield’s Retail Services Group in New York City.

Vacancies have declined in most major markets throughout the city with prime retail positions being absorbed quickly, O’Neill notes. A significant recent decline has occurred in SoHo, where the vacancy rate dropped to 10.8 recently from 14.72 percent at the end of 2004. Asking rental rates in SoHo have dropped slightly from fourth quarter 2004, declining from an average of $155 to $150. Rental rates are holding steady or increasing in other submarkets. The famed Madison Avenue retail corridor has seen its ground floor asking rental rates reach an all-time high, averaging $837 per square foot. “Rents on Madison Avenue from 57th Street to 72nd Street are ranging from $700 per square foot to $1,000 per square foot, depending upon the size, block, and positioning on the avenue” O’Neill notes.

Broadway, from 60th to 86th streets, boasts the lowest availability rate of any submarket at 2.5 percent, and landlords on the Upper West Side are asking approximately $223 per square foot for prime retail space.

In such a crowded market there is never a bevy of retail projects underway, but some significant properties with retail components are being developed that will impact the market in the coming years, and interest is high.

At 1880 Broadway on the Upper West Side, a residential project with 88,000 square feet of designated retail space is under development along a full blockfront between 61st and 62nd streets. Two other highly anticipated residential/retail projects underway in Manhattan at 2495 Broadway (25,000 square feet of retail space) and 150 East 86th Street (125,000 square feet of retail) will hit the market in 2007. And a project that has just been completed at 610 Broadway in SoHo has already created some buzz. Adidas is occupying two floors of retail and one floor of office space at Macklowe Properties’ seven-story, 120,000-square-foot modern mixed-use building.

That signing underscores the current popularity of SoHo as a prime retail district. Other recent leases in the area include the Dutch-based retailer Mexx signing a 3,700-square-foot lease at 500 Broadway, Sur La Table occupying 10,000 square feet at 75 Spring Street, and Oakley leasing the 4,500-square-foot former Metropolitan Museum of Art store at 113 Prince Street.

Investor demand for retail property in Manhattan is at an all-time high. Institutional money from REITs and foreign capital sources as well as from private equity are chasing the best properties while driving down supply and cap rates. Cap rates for prime retail properties from SoHo to Madison Avenue have dipped lower than 5 percent.

Expect demand to remain high even as rents reach record highs in some submarkets. “SoHo is a strong retail corridor, and there’s continued interest from national and international retailers in that market. While the submarket that has seen a tremendous increase in interest is the Bleecker Street corridor in the West Village,” says O’Neill. “Bleecker Street has become a red-hot market and has attracted some major global retail companies. It will be interesting to see how this influx of major retailers on Bleecker Street will impact the remainder of the retail streetscape throughout the West Village.”

O’Neill says to keep an eye on the fierce competition among banks to establish branches in prime corner retail locations throughout the city. “The interest from a handful of major banks has been citywide, and they’ve been extremely aggressive with their approach to retail real estate,” he says. Industry sources suggest the market has seen a lot of competition between Chase, Wachovia, Bank of America and Commerce over the past 12 to 24 months. “Any prime corner that is 4,000 square feet or greater is going to have competition from all of the major banks,” says O’Neill.

Many a company will trade high costs for the status and potential that goes with opening a store in New York City’s retail districts. Vacancy should continue to decrease slowly and new space will be filled as it comes available. The retail real estate market in New York City should experience continued success far into 2006.

Multifamily Market

With vacancy rates improving in all submarkets, the Manhattan apartment market continues to attract investors. Employment growth of 1.7 percent is forecast for 2005, up from 1.5 percent last year, with the professional and business services sector leading employment growth, which bodes well for the apartment market. Investors will find opportunities in the Morningside Heights/Washington Heights submarket as well as the outer boroughs as 2005 progresses.

Vacancy in Manhattan will decline 70 basis points in 2005, to 3.5 percent. The vacancy rate should fluctuate between 3 percent and 4 percent in the near term, sufficiently low to support continued rent growth. Owners in specific submarkets will confront challenges, however. Property performance in the West Village/Downtown submarket may trail that of other submarkets for the next few quarters as new units come online and tenants slowly warm to new residential neighborhoods. Properties west of Eighth Avenue in Midtown, many of which were delivered recently, are still facing their initial round of lease renewals.

Effective rent growth is keeping pace with asking rent growth after lagging for a few years. A 2.7 percent increase in asking rents for Manhattan apartments, from $2,922 to $3,000 per month, will occur in 2005 as owners continue to regain the pricing power they ceded for a few quarters beginning in late 2001. Effective rents will also go up as the use of concessions wanes. Asking rent growth in the outer boroughs will be 2.3 percent.  

In addition, deliveries in Manhattan will increase from 3,370 units in 2004 to 4,300 units in 2005. Considerable activity is occurring in the Morningside Heights/Washington Heights and West Village/Downtown submarkets. Conversions of office buildings to residential rental units, however, have slowed.

Investors are finding reasonable values and upside opportunities in the outer boroughs where fundamentals have remained strong. The vacancy rates in Queens, Brooklyn and the Bronx are expected to be lower than that of the overall market in 2005 as many residents become priced out of Manhattan. Effective rents as a percentage of asking rents are higher in the outer boroughs and will continue to be higher in the near term.

Investors will also likely focus on Manhattan’s Morningside Heights/Washington Heights submarket as they did in 2003 and 2004, due to a greater number of opportunities. The median price per unit is the lowest among the Manhattan submarkets and is in line with values in Queens or the Bronx.

— Mitchell R. LaBar is a managing director at Marcus & Millichap and regional manager of the firm’s Manhattan office.

Office Market

While this year hasn’t yet matched 2004’s banner year for Manhattan’s office market, Midtown remains very strong, Midtown South continues its steady performance, and Downtown, while still lagging, has shown positive indicators. Manhattan-wide leasing totaled 11.21 million square feet through May, compared with 11.78 million square feet during the same period last year.

Midtown saw above-average leasing compared with the 5-year monthly averages in 4 of the first 5 months of the year, although space additions have contributed to absorption of negative 800,000 square feet. Availability has hovered just above 10 percent. Average asking rents increased every month except February.

Activity in Midtown South has remained steady. Year-to-date leasing of 2.17 million square feet is 18 percent more than 1.84 million square feet in 2004 and on par with the 5-year monthly average. Absorption totaled 960,000 square feet, a reversal from last year’s negative 110,000 square feet. As availability has gone down (10.3 percent compared with 12.6 percent in 2004), the average asking rent has increased every month since January, finishing May at $33.60 per square foot — the highest level since December 2003.

Downtown has witnessed a residential boom in the last couple of years, thanks in part to lower rents and office buildings being converted to condominiums and apartments. Now the goal is to couple the residential growth with a strong business environment in an effort to make Downtown a 24/7, work-play-live community. There have been positive signs indicating that this is happening, including Morgan Stanley’s recent announcement that it would move 2,300 employees to One New York Plaza and the rise of 7 World Trade Center, a 1.67 million-square-foot building that reflects the continued progress of Lower Manhattan’s rebirth. The addition of this property contributed to 1.15 million square feet of negative absorption through May, while overall availability stood around 16 percent. The addition of 7 World Trade Center’s high-quality space also resulted in an overall upward adjustment in pricing, with average asking rents ending May at $34.42 per square foot.

 If New York’s economy continues to grow and employment levels remain steady, it’s likely that Midtown and Midtown South will continue their strong performances. With a growing residential population and continued commitment from the private and public sectors, Downtown is poised to continue its rebound as a competitive real estate market not only in Manhattan, but across the country as well.

— Dean Shapiro is an executive managing director of CB Richard Ellis in New York City.

Investment Sales Market

The investment sales market in New York City has been significantly stronger than in 2004, with several very large transactions, including the largest single-asset sale ever in the United States, which was MetLife’s sale of 200 Park Avenue to Tishman Speyer for approximately $1.72 billion.

“Our team at Cushman & Wakefield exclusively represented MetLife in the sale of 200 Park Avenue, and there was very intense bidding for that asset” says Richard Baxter, an executive mangaing director in the New York City office of Cushman & Wakefield. Other large transactions include MetLife’s sale of One Madison Avenue to SL Green for $918 million and the sale of 575 Fifth Avenue, which should be closing shortly at about $385 million.

According to Baxter, investment sales activity in New York City in 2004 totaled about $15.1 billion  for the year. “Today, we’re approaching $10 billion, and it’s not even the end of the second quarter,” he says. Baxter believes that pace will continue in a similar manner over the next 24 months or so.

Investors that have been active in the area include REITs such as SL Green and real estate companies such as Tishman Speyer. “On the individual investor side, Jeffrey Feil has been very active, and many of the individual families — the Chetrit family, the Moinian Group — are once again on the market to buy,” says Baxter.

“There’s tremendous demand for quality product in Midtown Manhattan. Any property that is put on the market is very competitively bid, and I think it’s the first time that we’re seeing sub-5 percent cap rates for stabilized assets,” says Baxter. “This ties into the debt market, and as long as lenders remain aggressive, I think there will be continued cap rate compression.”

One change in the investment market that Baxter is seeing relates to how buyers on the market are viewing vacancy. “I think in 2005, for the first time, vacancy is being viewed as a premium to a property. Most of the investors that are active today are very bullish on rent growth, and any property that has rollover within the next 3 to 5 years, for below-market rents, it’s really viewed as a premium,” says Baxter. He attributes this to the expectation that rents will escalate and as leases roll over, owners will have more ability to choose their tenants and choose their rental rates.

With all of the investment activity, Baxter notes that there isn’t a lot product for sale on the market as properties are moving quickly. “Our team, in the past two weeks, has put five properties under contract,” Baxter says. “Several of those are office buildings in Midtown priced in the $35 million to $200 million range. And there has been just a continual tremendous appetite for any Midtown office building, and for that matter, any property that could be converted to residential. There are a tremendous amount of residential sales going on.”

According to Baxter, investors are focusing more on Midtown than Downtown, where properties are trading at about a 50 percent discount to Midtown assets, on a price-per-square-foot basis. However, in a market like New York City, there has been significant activity in every market.

“I think now, a lot of the investors are looking into the boroughs for opportunities,” says Baxter. “So we’re seeing Brooklyn getting a tremendous amount of activity on the development side, as well as any suburban area that’s near mass transit.”

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