MARKET HIGHLIGHT, JULY 2008
NEW YORK CITY MARKET HIGHLIGHTS
Midtown Manhattan Office Market
Lack of Construction Upstarts Does Not Hamper World’s Most Elite Business District
Despite the opening of several key construction corridors, including the former Hudson Rail Yard on the Far West Side, high-rise office development in Midtown’s core business district remains virtually non-existent. While projections indicate there will be an insufficient amount of product delivered to market in the next 24 months, this lack of new Class A office space is rippling through Midtown with rising rents.
According to Cushman & Wakefield, JRT Realty Group’s strategic alliance partner, only 5.5 million square feet is expected to be added to the office inventory over the course of the next 2 years — an inadequate amount of product to meet modest demand for a prestigious address in the world’s most celebrated business district.
While 4.6 million square feet has been slated for Downtown development at the Freedom Tower site, less than 3.4 million square feet is on the books for Midtown. These projects are dispersed between Madison/Fifth Avenue (350,000 square feet) and 6th Avenue/Rockefeller Center (2.1 million square feet) where asking rents exceed $100 per square foot as well as Times Square South (1 million square feet).
For many property owners, this lack of new supply is prompting many investors to launch aggressive property repositioning efforts. At 470 Park Avenue South, new owner TIAA-CREF, the national financial services firm, is launching several upgrades to deliver significant risk-adjusted returns on its portfolio investment. Built in 1912, the 18-story Class A office tower is well situated on Park Avenue, between Penn and Grand Central Stations. Amenities include classic architecture as well as a recently renovated marble lobby and redesigned elevators. The property’s prime location, in the heart of Midtown’s most elite district, complements its appreciation potential.
Despite the strength of the Midtown market, some tenants are seeking economic alternatives in other neighborhoods throughout Manhattan. The outer boroughs of Brooklyn and Queens, especially Long Island City, offer far more attractive rents and the allure of brand new Class A product. One example is the fully leased Court Square Place, completed in late 2006, in Long Island City. Many of the full-floor tenants relocated their operations from Midtown, just 5 minutes away via train, to decrease rents, increase amenities and enhance the workplace environment.
With asking rents averaging almost $90 per square foot in Midtown, the age-old concept of supply versus demand exists. There is less office space today than 13 years ago. Very little is expected to be delivered to market any time soon. As a result, the Manhattan office market is poised to weather the current economic climate because of one simple truth — tenants equate a prominent business address with being at the crossroads of international business.
— Greg Smith is the executive vice president of JRT Realty Group, Inc., based in Manhattan, where he spearheads the firm’s leasing and property management teams.
Staten Island Development
As one of the fastest growing boroughs in New York City over the last 5 years and home to a population of approximately 550,000, Staten Island is also the most underserved borough in terms of retail. “Staten Island is a completely underserved market for retail across the board at many different levels, but the demographics here on the Island are very strong with high household incomes as well,” explains Thomas J. Kerbleski, an associate broker for Casandra Properties, Inc., a local leasing agency and project management group on Staten Island. Across Staten Island’s entire 59 square miles, the main retail option for residents is the regional mall, forcing many to do their shopping off the island in New Jersey or Manhattan. However, that is soon about to change.
Waterfront Commons, a 485,000-square-foot retail center located on the waterfront on the southern end of Staten Island will feature a blended lifestyle center and an outlet center.
Leib Puretz is currently developing Waterfront Commons, a 385,000-square-foot retail center located on the waterfront on the southern end of the island. The hybrid project will feature a blended lifestyle center and an outlet center that will include approximately 100,000 square feet of entertainment and restaurant space, a 14-screen stadium seating movie theater with an all digital format, and approximately 20,000 square feet of sit-down restaurants, bars and cafes. The remainder of the space will contain about 285,000 square feet of factory outlet tenants.
The 25-acre project will also include a 2,000-foot-long promenade on the shoreline and a planned dock for water taxis and ferry service. “It is the first of its kind in Staten Island and the first outlet center in New York City,” notes Kerbleski, an exclusive agent for Waterfront Commons. “We wanted to offer locals an attractive destination shopping center that would provide more higher-end retail than what is currently on the island. The Staten Island Economic Development Corporation recently did a study which showed that 46 percent of all shoppers on Staten Island leave to go to higher-end retailers that are currently not here.”
The borough’s demographics and its underserved retail market, coupled with the project’s aesthetic design and its strategic location adjacent to the Outerbridge Crossing, which has 83,000 cars a day passing over it, makes Waterfront Commons an ideal location for tenants. The project has been extremely successful with approximately one-third currently out to lease. “Because the demand has been so high, the developer is looking at a neighboring site to begin a phase II,” says Kerbleski. “It will be complementary retail to phase I.” Construction is set to begin on phase I within 6 months with a targeted opening of 2010.
In addition to Waterfront Commons, Leib Puretz is also developing seven different projects totaling approximately 650 luxury condos and a quarter million square feet of commercial space on the north shore of the island in the St. George neighborhood. “Like all of New York City, the demand for luxury residential condos has been very high,” notes Kerbleski, who is the exclusive agent for Leib Puretz’s mixed-use residential developments as well. “The quality of construction that is being offered for the price is nothing like any of the waterfront properties in the New York Metro area. Those that were priced out in the Manhattan and Brooklyn markets are coming here for properties that are priced at $500 to $600 per square foot with views of Manhattan and the Statue of Liberty, and they are right on the water.”
— Stephanie Mayhew
Soho Retail Market
The Soho neighborhood in Manhattan, New York City, has become synonymous with shopping and entertainment. Bounded by Houston Street on the north, Layfayette Street in the east, Canal Street on the south and Sixth Avenue on the west, the growing popularity of the area has made it the place to be for retailers.
Just in the last few years, the retail rental rates on Broadway in Soho have increased dramatically. Three years ago, retail rents on the first block on Broadway between Prince and Houston streets were around $200 per square foot, but today even small space on the first and second blocks of Broadway are ranging from $400 to $500 per square foot.
Many high-end fashion retailers are clamoring to open stores in Soho, not just for the opportunity for high retail sales, but to have a presence in one of Manhattan’s most sought after markets. Hugo Boss recently signed a substantial lease on Broadway between Prince and Spring streets, which in turn has prompted other major fashion retailers to seek space in the area. Many top European designers are also beginning to look for space in the Soho area.
The Soho area is not just attracting small shop luxury retailers, there has also been speculation that large high-end fashion tenants such as Barney’s are also looking into space within the neighborhood. However, aside from luxury fashion retailers, every type of retail tenant wants to be in Soho. Fashion designers, big-box retailers and even retailers that have stores on Madison Avenue in the 60s want to be in Soho. Hollister, a lifestyle brand by Abercrombie & Fitch Co., is opening up a mega-store on the corner of Broadway and Prince streets, which promises to further change the dynamic of the neighborhood and the retail market in Soho.
Despite the neighborhood’s popularity, the Soho retail market has its share of disparities, making it a tricky place to navigate for retailers. The retail sector in Soho is a completely different animal from the rest of Manhattan, since the retail rental rates vary from block to block. The first and second blocks on Broadway between Prince and Houston streets are very strong; however, south of Bloomingdale’s, which is the third block, the retail market changes because the foot traffic is not fully there yet, so tenants will find a drop in rental rates.
Retail rates vary not only from block to block, but on each and every street in this dynamic neighborhood. A tenant will find a different retail value on Broadway between Houston and Prince versus between Prince and Spring streets. In addition, Spring and Prince streets have a completely different retail value than Mercer, Greene or Wooster streets. However, the areas with lower rental rates are by no means weak. Wooster Street, which is probably considered one of the weakest retail areas in Soho, still commands around $100 to $150 per square foot.
Although the foot traffic has not reached the same fever pitch in all areas of Soho, many landlords and tenants are hedging their bets that the foot traffic along Broadway will soon expand down to Canal Street and even past it, resulting in the same astronomical exposure and rents. Several tenants that are unable to find the right kind of spaces within the first few blocks of Broadway are taking space farther south of Bloomingdale’s.
That being said, the aforementioned disparity in rents is quickly narrowing. As the demand continues to grow, the rental rates south of Bloomingdale’s have gotten higher as tenants lease big and small spaces. In addition, West Broadway may not generate the same amount of foot traffic found on Broadway, but the street is beginning to garner more and more attention from retailers and investors. I recently sold five buildings on the corner of West Broadway and Prince Street, which is fast becoming a prime retail corner with anchor tenant, Max Mara.
Many tenants are looking for space on West Broadway simply because it offers a completely different type of retail market. The area has been geared towards the very high-end art galleries and certain fashion stores that serve a different type of clientele, unlike Broadway, which caters to everybody. Some tenants only want to be on Broadway while some want to be on Prince or Spring streets because they feel that the area caters to a higher end clientele than the commercial masses on Broadway.
Office space in Soho has become a hot investment commodity as well. Right now office space in some instances is commanding $55 per square foot. More residential and hotel developments are also moving into the area. Soho is attracting tourism and corporate clients, but there is a lack of upscale hotels in the area to meet the demand. I recently brokered the approximately $33 million sale of the MoonDance diner site on 6th Avenue and Grand Street. The new owner plans to build a boutique hotel on the site, about 65,000 square feet.
The development of boutique hotels and residential space is increasing, but there is a lack of land in Soho, so if a buyer finds the right site, they might have to pay a bit more than they would elsewhere in Manhattan. Although the cost of land is higher in Soho, the reward is higher as well.
As Soho grows in popularity, the retail sector will just keep getting better and better and down the line it will be an equivalent of Madison Avenue between 57th and 72nd streets. Retailers want to be here, office tenants want to be here, and more hotels and high-end residential condos are coming to the area, so the future remains bright for Soho.
— Ivan Hakimian of Itzhaki Properties
New York City Industrial Market
Industrial Market in New York’s Outer Boroughs Remains Strong as Supply Dwindles
With more and more New York City industrial neighborhoods becoming gentrified, industrial properties are in increasingly short supply. The situation is especially notable in the outer boroughs, where most of city’s industrial real estate activity is focused. Over the past 10 years, approximately 30 percent of industrial property in the outer boroughs has been converted for other uses.
In fact, the city’s decision to rezone industrial neighborhoods for residential and commercial development has created a strong market for warehouse and manufacturing spaces. The outer boroughs are all experiencing similar industrial market conditions, with a vacancy rate hovering around a mere 3 percent.
In Brooklyn, the Bush Terminal and Gowanus areas remain heavily industrial, while Red Hook, Green Point and Sunset Park are seeing an increase in residential developments. The Bronx has always offered a smaller inventory of warehouse and manufacturing facilities, predominately in Port Morris and Hunts Point, and recent conversions have made availabilities tighter than ever. The industrial market on Staten Island, which was always limited, has not experienced much change.
Queens is currently the most active borough in the industrial sector. Many neighborhoods, such as Woodside, Maspeth, Corona and College Point, have kept their industrial identities. Other areas, like Astoria and Flushing, are seeing rapid conversions to other uses. Flushing, in particular, is seeing a great deal of residential and commercial activities. The interest in this central Queens neighborhood is so overwhelming that rents and sale prices are skyrocketing, and most landlords have sold their industrial properties for redevelopment.
For the most part, industrial rents in New York City have remained stable. Properties in Queens and Brooklyn are going for approximately $10 to $15 per square foot. In the Bronx, it ranges from $8 to $12 per square foot. Due to the tightening inventory, industrial landlords are having no trouble finding and retaining tenants. However, owners of smaller buildings at 20,000 square feet or under are noticing that there is a better market for purchase. The buyers include both investors and users.
The city’s rezoning laws and the conversion of warehouses and manufacturing plants have contributed to the buoyant nature of New York’s industrial sector. Demand has remained the same, but there is fewer product. The industrial market has been strong for the past 6 years, and this is expected to continue.
— Sanford Zuckerbrot founded Sholom & Zuckerbrot in 1962 and currently serves as its chairman.
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