MARKET HIGHLIGHT, MARCH 2006

NEW YORK CITY MARKET HIGHLIGHT

New York City Industrial Market

Decades of declining industrial demand coupled with an incoming tide of the 20 to 30 year olds, which are the feedstock for household formation, have forced a political shift in land-use legislation.

Great swaths of industrially zoned property from Brooklyn to the Bronx either have been redesignated residential or will be within the next 24 months. This has resulted in heightened expectations for windfall profits by those lucky enough to find themselves owning rezoned property; resulting in a virtual shutdown of industrial sales and long-term leases in those districts. An excellent example would be the sale of 47-05 Fifth Street, Long Island City, Queens, one of the smaller development sites formally situated in a heavy-manufacturing use district. Suitable for any industrial use, this property would have normally come on the market for roughly $1 million, or $100.00 per square foot; affording the owner-occupant a carry cost rental equivalent of $12.00 psf per annum. Due to its rezoning, it came on the market at $3 million, to be sold at $2.7 million.

Developers such as Rockrose, Minskoff, Silverman, Cappelli, Forest City Ratner, Lincoln Properties, Muss, and Related, are all in the fray and scrambling for market share for what will become the new residential communities of Queens and Brooklyn.

Properties that have been priced on a square footage basis are now priced on a FAR —   floor area ratio — basis, wherein the developable area is computed on a ratio of its developed sellout price. Over the past 3 years, that FAR per square foot price has risen from $10 to more than $200 per square foot, as the perception of developers has firmed regarding achievable sellout prices for new condo product.

In every market there is always risk, except when one looks back retrospectively. The $20 FAR number was very risky when a market for new condos did not exist. The $200 per square foot appears now to have little risk when there is a proven market at $600 to $700 per square foot for finished product. However, the 2-year time lag to bring the product to market and the rising cost of construction can erode a builder's profit margin to zero. Therefore, since the beginning of 2006, the market has witnessed a leveling off in pricing increases but not activity. Well located and well priced zoned parcels of land or existing industrial buildings are continuing to be snapped up as soon as they hit the market. An excellent example of these phenomena would be the Adirondack Chair Building of 100,000 square feet, situated at Broadway and Vernon Boulevard, in Long Island City/Astoria. A charming turn-of-the century loft building with accessory land, the value of the existing structure when added to a reasonably projected condo sellout price of around $600 per square foot, netted its corporate owners more than $20 million.

Another example would be the 90,000-square-foot loft building situated at Queens Plaza North and 24th Street in Long Island City. Occupied by a knitting plant for more than 30 years, the ownership found itself included in the lucky zoning club with an award of 320,000 buildable square feet. Its unique location, as well as a loophole allowing for an unrestricted building height, created a bidding frenzy among local and national developers, resulting in an ultimate sale price of $23 million.

As predicted, this reduction of industrial property inventory has resulted in a commensurate increase in industrial property pricing, so much so that in certain peripheral areas, the highest and best use still remains industrial rather than residential conversion. This may prove to be a very propitious market response for the over-development of the boroughs to residential cannot ultimately be a healthy land use for a city that still requires a diverse economic base.

— John Maltz, SIOR, is president of New York City-based Greiner-Maltz and Decio Baio, ICSC, is a senior director at the firm.

New York City Office Market

The New York City real estate market continues to thrive with tenants (represented by their tenant reps) and landlords actively negotiating for the most competitive lease packages on the market.

Fourth quarter 2005 brought an increase in leasing activity throughout Manhattan and a definite tightening of inventory across all classes of office space in Midtown, Midtown South and Downtown, including sublease space, which accounted for about 22 percent of the available space in the city. As a result, the sublease availability rate declined to 2 percent, the lowest rate since 2001. Manhattan's overall availability rate (9 percent) decreased by 1 percentage point on both a quarterly and annual basis. Midtown's availability (7.7 percent) and Downtown's availability (13.3 percent) posted a decline as well, on both a quarterly and annual basis.

The dynamics of supply and demand pushed overall rental rates up in Midtown to $47.31, an increase of 1.6 percent for the quarter and 8.2 percent for the year. Downtown's overall rent of $36.20 also grew for these periods by 1.0 percent and 1.1 percent.

Several large transactions at the end of 2005 helped to push the needle down on the inventory scale. Ten transactions, totaling more than 2.2 million square feet, were completed, including two major Midtown deals — Citigroup for 300,000 square feet and St Paul Travelers for 210,609 square feet. DHL also signed a lease on the West Side for a new 250,000-square-foot facility.

Development also continues to thrive in Manhattan. The extraordinary rise in home values in recent years led to a reallocation of some institutional capital toward residential. As that market has begun to cool, office is anticipated to, over time, regain its market primacy. Downtown, 7 World Trade Center and the new headquarters for Goldman Sachs are the most talked about commercial developments. For residential, developers Minskoff and Resnick both plan to develop residential buildings.

Moving uptown, development of Midtown will continue to spread west and north as the popularity of the “traditional” Midtown on the East Side and the burgeoning Midtown of the West Side bordered by Sixth Avenue continues to grow. In addition to the new New York Times building, the Bank of America building and the renovated Verizon building, there are proposed plans to develop 1.45 million square feet at 20 Times Square by Lawrence Ruben Company and Vornado and 1.1 million square feet at 11 Times Square by Milstein Properties — sites that straddle Eighth Avenue.

Looking forward, the relationship between tenants and landlords is slowly stabilizing. As the market continues to tighten, companies will be looking to the more tenant-friendly Downtown for space. Tenants will also be looking to tenant-rep experts to help them negotiate through a tighter market typically characterized by fewer points of negotiation.

— Greg Taubin is a senior managing director with the New York City office of Studley.

New York City Investment Market

Real estate investment sales activity in 2005 was frantic in New York City, as some of the city's most prominent hotels, apartment buildings and office properties were acquired by a wide variety of sponsors. Many of these transactions set price-per-square-foot, price-per-hotel-room and capitalization-rate records during the year. The white-hot market for Manhattan real estate continues. Manhattan House, Essex House, the Helmsley Building and the MetLife building were all examples of trophy properties that were acquired by investors in 2005.

The confidence evidenced by both foreign and domestic investors seems to be well founded as we proceed into 2006. Already it looks like this year could be one of the best years for hotel occupancy and rates, largely due to the fact that a number of Manhattan hotels, including the Mayflower and the Plaza, are either totally or partially converting to condominiums. Similarly, the office market in Midtown and Midtown South is very active. Manhattan's overall rental rate posted at $47.31 as of the fourth quarter of 2005, an increase of 1.6 percent for the quarter. Rents will most certainly continue to increase and, consequently, landlord concessions will decrease. Although it is unlikely that we will see the rapid commercial office space rental growth that took place during the late 90s with the dotcom boom, a steady increase in rents will be welcome news to the latest batch of office building investors.

Our firm, Eastern Consolidated, has also noticed a return to quality by investors who, for several years, were willing to acquire property in fringe neighborhoods. We are noticing that demand for prime locations in SoHo, the Plaza District and Chelsea is increasing as investors worry about pioneering locations, but pay record prices to be in the most important areas of Manhattan and Brooklyn. Currently we are marketing a trophy retail property on Spring Street, in the heart of SoHo, with retail tenants Burberry and Diesel Jeans. We expect there to be fierce competition for this building and others like it.

The projections for investment-quality residential properties are also positive, given the very limited supply of large apartment houses for sale in New York City. Both rent-regulated and free-market projects are highly sought after, and in fact, our firm just completed the sale of a 131-unit apartment building in the highly desirable West Village. This property sold for almost $1,000 per square foot to Equity Residential, one of the largest residential REITs in the country. Equity will continue to operate the property as a rental, further proof that current investors believe in the future growth and strength of New York City.

— Eric Anton is a senior managing director with the New York City office of Eastern Consolidated

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