MARKET HIGHLIGHT, MARCH 2007

NEW YORK CITY MARKET HIGHLIGHTS

Retail Market

Despite an increase in vacancy on Manhattan’s Upper West Side, this thriving retail market there saw an 11 percent increase in average asking rents, which now hover at $300 per square foot. Retailer activity was led by Best Buy’s 46,000-square-foot lease at 1880 Broadway, the retail component of Zeckendorf’s luxury residential development at 15 Central Park West. The new development represents one of the most significant new retail components on the Upper West Side, and will fill a long-dormant Manhattan block front. Best Buy’s commitment as the anchor tenant will close the gap between Columbus Circle and Lincoln Center.

Unceasing demand from both leading national and international apparel retailers has pushed Soho retail rents up $40 to $210 per square foot. French-owned fashion house Cotelac leased 3,200 square feet at 94 Greene Street for its first Manhattan boutique and Japanese luxury denim brand Evisu will open its U.S. flagship store at 92 Greene Street. The North Face opened its second Manhattan location in 2006, taking 4,300 square feet at new development 139 Wooster. The retail space, located between West Houston and Prince Streets, is part of a new luxury loft-style condominium development by the Arun Bhatia Development Corporation.

Upper Fifth Avenue continues its reign as the most expensive retail location in the world, with rents approaching $1,500 per square foot. A lack of available space on the premier corridor has drawn interest south of 49th Street, an area once overlooked by major national retailers. Ann Taylor expanded its Manhattan presence with a 9,600-square-foot lease at 600 Fifth Avenue, located on the northwest corner of 48th Street, and H&M took nearly 25,000 square feet of retail space at 505 Fifth Avenue, the new office building on the northeast corner of 42nd Street.

Retail rents are rising steadily on Madison Avenue, up nearly $70 per square foot from 2005, with many spaces asking in excess of $1,000 per square foot. Designers continued to bring their fashion to Madison Avenue, with Issey Miyake signing a lease at 804 Madison Avenue, Dolce & Gabbana taking space at 827 Madison Avenue and Nicolas Petrou opening a new location at 846 Madison Avenue. Tom Ford also announced plans for his first menswear boutique at 845 Madison. Shoe retailer Taryn Rose relocated from 30 East 60th Street to a more prominent Avenue spot at 681 Madison Avenue.

— Gene Spiegelman, executive director; Jim Downey, senior director; Joanne Podell, senior director; and Alan Napack, senior director, Cushman & Wakefield’s Retail Services

Multifamily Market

After several years of New York City multifamily properties appreciating rapidly and selling at higher and higher multiples it seemed likely that the beginning of 2007 would be the time when the dust finally began to settle. Over the last 3 to 5 years, multifamily properties in every neighborhood of every borough have been increasing both in value and in volume of sales. However, this predicted downturn has not happened and the new year has simply brought lines being drawn around hot neighborhoods and areas that are simply leveling off.   

An area of the city that continues to be hot is Manhattan. According to GFI research, the volume of investment property sales fell 10 to 20 percent during the summer and early fall months from over the same period last year. However, in November, the volume of trading began to increase gradually until 2007, when properties began trading hands at a frenzied pace. A major reason is the influx of capital into the investment sales market. Every day banks are looking for interesting ways to invest into the still-growing market and every day GFI brokers field incoming calls from aggressive buyers looking to find multifamily properties — especially in the white-hot Upper West and Upper East sides. The volume of trades and the prices of investment deals are as high as they have been.

In addition to the thriving income-producing market, a once declining multifamily development market is also on the rise again with the passage of amendments to the city’s 421-a tax plan. The amendments now require any new developments that begin after 12/31/07, in certain designated areas of Manhattan and Brooklyn, to build 20 percent of the on-site apartments as affordable housing. Countless developers are finding themselves grasping for development opportunities before the 12/31 cutoff date. Because of these new amendments, new developments may no longer be feasible as a result of lucrative land prices that already leave developers with extremely tight profit margins. With the cost of money still low, the tremendous amount of money coming into investment sales from the capital market, the looming 421-a amendments, and the average Manhattan apartment selling at $1,007 per square foot, developers throughout the city are searching for development opportunities that will allow them to take advantage of the current market conditions.  

— Michael Kerwin, senior investment sales broker, GFI Realty Services

New York City Investment Market

The year 2006 may be remembered as the year that the general public finally became aware of the investment sales market. Throughout the tri-state region, the average resident was bombarded by stories of investment sales activity which included the $5.4 billion record setting Stuyvesant Town, Peter Cooper Village sale, and the $1.8 billion 666 Fifth Avenue transaction, both spectacular investment sales records. So many well known buildings have traded recently that it is hard to keep track of all the major commercial, residential and hotel sales. 

The past year of frenzied activity resulted in many investment sales firms achieving property transaction records as well. For example, Eastern Consolidated completed more than $2 billion in sales, with the great majority of that activity in Manhattan. The story of 2006 was really about adaptive re-use of older structures, and the rise in values for cash-flowing investment property, as opposed to the year before, which was about the frenetic sale of sites for ground-up new construction of residential condominiums.

Moving forward into 2007, there remains a tremendous amount of investment capital available for prime Manhattan residential, commercial and hospitality properties. Capital is flowing so freely that large-scale transactions are being bought and resold in a very short period of time, months rather than years as in the past. Buildings such as 2 Park Avenue, which were bought and then resold for more than $100 million profit are recent evidence of this trend. When properties are made available to the investment community through an exclusive broker, the seller is strongly in control of the process and can require buyers to move much faster than ever before. Information review periods of weeks, instead of months are now common, and contract negotiations are now extremely one-sided, and are presented pretty much as “take it or leave it” by the seller.

Investor sentiment is strong for all areas of Manhattan, but most investors are seeking to be on major Avenues in Midtown for commercial properties, and for residential properties the hot area is still Lower Manhattan, south of 23rd Street. The hospitality market has been so strong, with rates achieving pre-9/11 highs, that hotel properties in all locations throughout Manhattan are commanding record pricing levels. Some of the most active investors are now coming from Ireland and England, as well as the Middle East and China. The Irish in particular are now enjoying a strong economy and favorable tax treatment if they invest abroad. Israeli real estate companies are also continuing to invest in New York, particularly on the residential side.

Another striking aspect of the current market is the willingness of almost all types of investors to spend a great deal of money on renovation and capital improvement projects. Unlike past decades, buyers these days seem willing to spend the money to really upgrade properties to first-class, modern status. Apartment building buyers are eager to create in-house gyms, even in small- to medium-sized properties. Similarly, commercial property owners are planning to create building amenities for tenants and are upgrading lobbies, technology, and services, all in the pursuit of higher rents.

2007 should be a great time for the investment market, the only challenge will be the lack of product to satisfy all the new buyers entering the market.

— Eric Anton, executive director, Eastern Consolidated

New York City Office Market

Even as rents for office space in New York City spiked at the end of 2006 and are expected to continue to escalate in 2007, tenants are agreeing to pay these high rates. Businesses are becoming accustomed to hearing asking rents of $100+ per square foot for premium Class A Midtown space, which isn’t surprising since the average rental rate for Class A space in that market is $75.21, nearly one and a half times the city’s overall average rental rate of $54.40.

Limited supply today and in the near term and increasing demand are driving these rent increases. New York City’s availability rate closed the year at 7.7 percent overall and 6.6 percent for Class A buildings — numbers reminiscent of 2000. Although absorption in 2006 was marginally lower than in 2005, as of mid-January, only 31.24 million square feet was on the market for lease in a city with more than 400 million square feet of office space.

Downtown has also gained momentum. Although a portion of the absorption came from significant Midtown tenants moving Downtown, its growth was primarily driven by tenants who were already located in the submarket. This year, Downtown started off slowly, however, with 5.1 million square feet of Class A space available, but ended it with a bang with only 1.94 million square feet available — a rate of 5.1 percent, earning the distinction of being lowest availability rate among the nation’s major central business districts.

New York City has always been and continues to be a unique marketplace, a virtual magnet for companies wishing to debut, expand, or consolidate. The city’s economy continued to expand in 2006 and as of November, the greater New York Metropolitan area led the nation in annual job growth adding 72,500 new jobs. The challenge of course in commercial real estate remains being able to accommodate existing and incoming tenants, at affordable rents, in appropriate neighborhoods, while suppressing the pressure to overbuild, a pressure that can be difficult in a city that is home to so many Fortune 500 companies, major law firms, financial institutions and support industries like advertising, information technology and graphic design.

The commercial real estate market in Manhattan will continue to tighten, at least in the short term. With no new building relief in sight until 2009 ,when 11 Times Square is delivered to the market, future supply in the near term is dependent on companies giving back space as a result of move-outs, mergers, consolidations or downsizing.

— Steven Coutts, senior vice president, National Research Services, Studley


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