MARKET HIGHLIGHT, OCTOBER 2011

NEW YORK CITY

Retail

Throughout 2011, New York City has strengthened its foothold on the retail market. The multi-national city of more than 8 million people — aptly dubbed “The Capital of the World” — is drawing 50 million tourists from all over the globe, and they are spending more than $31 billion annually. With those kinds of numbers, the city is fertile ground for dozens of retailers — both foreign and domestic — who seek to expose their brands to an enormous, widely diversified audience.

Luxury fashion retailers Zagliani, Moncler, Christian Louboutin, Agent Provocateur and Dolce & Gabbana, apparel specialists Desigual and Mango, along with jewelers and watch sellers Vacheron Constantin, Wempe and Girard Perregaux, are among the many international merchants leasing prime Manhattan space. Some are venturing into hot new retail enclaves created in Soho or the Meatpacking District rather than trying to make a go on pricey Fifth or Madison avenues.

Several high-profile retail leases have recently been inked, including Japan-based casual clothing seller Uniqlo which leased an eye-opening 89,000-square-foot space at 666 Fifth Avenue in 2010 as part of a $300 million, 15-year commitment. Also, Forever 21 debuted its new 91,000-square-foot flagship store on Broadway, while Italy’s Dolce & Gabbana recently secured 18,400 square feet at 717 Fifth Avenue.

According to the Real Estate Board of New York, asking rents leveled slightly in the spring along prestigious Fifth Avenue from 49th to 59th Streets, a stretch that’s been ranked as the most expensive in the world, to a still-lofty $2,250 per square foot, down 2 percent from the previous year, while Madison Avenue rents dipped 4 percent to $919 per square foot. Times Square remains a force with a huge volume of foot traffic, commanding rents of about $1,500 per square foot. Many of the hottest retailers and restaurants that have been priced out of the high-end districts are opting instead for Soho, the West Village, the Meatpacking District or Midtown’s Flatiron District, where rents range from $250 to $550 per square foot. In particular, Soho has become a nouveau haven for French, Italian and other European merchants and eateries.

There’s also plenty of activity on Fifth Avenue below 49th Street, where Urban Outfitters landed a 32,000-square-foot spot at 521 Fifth at 43rd Street, not far from Canadian fast-fashion retailer Joe Fresh, which absorbed 15,000 square feet at 510 Fifth. Union Square continues to draw mid-level retailers, and supports big-box retail such as Filene’s Basement, DSW, Whole Foods and Trader Joe’s.

Several redevelopment projects are on tap. In downtown Manhattan, about 200,000 square feet of remerchandised retail/restaurant space is emerging at Brookfield Office Properties’ World Financial Center. The long-awaited new World Trade Center, slated to open in 2014, will have about 300,000 square feet of retail initially, with an additional 200,000 square feet planned. In Midtown, the Related Companies’ planned Hudson Yards and the Penn Station expansion both promise 750,000 square feet of retail. Upgrades to the street retail are also slated for South Street Seaport/Pier 17.

Lower Manhattan is on the comeback trail as evidenced by increased leasing and investment. Rents jumped 36 percent there this year to $184 per square foot in the Financial District’s Broadway Corridor.

Moving forward, New York City is likely to gather additional momentum in 2012. To wit, retail rents on Madison Avenue — which dropped from the $1,200- to $1,500-per-square-foot range before the economic downturn to $600 to $700 per square foot during the recession — have crept back to around $900 per square foot. New York City’s retail vacancy rate dropped to 2.2 percent in the second quarter of 2011 from 2.3 percent the previous quarter, compared with the national vacancy rate of 7.1 percent, according to CoStar. Strong, improving consumer traffic and highly desirable co-tenancies by some of the world’s top retailers are likely to keep the city on nearly every major retailer’s radar screen for some time to come.

— Robin Abrams is an X Team International partner and executive vice president of New York-based The Lansco Corporation.

Multifamily

The multifamily apartment market has always been a leading indicator for the investment sales market in New York City. Rent-regulated apartment buildings here have been the asset class most highly demanded by investors and have always been the property type for which financing has been plentiful and from multiple sources. The upside potential of these properties, based upon artificially low rent levels created by rent regulation, creates a scenario in which there is almost no downside risk. Even throughout our most recent recession, when market rents fell by 20 to 25 percent, most regulated buildings continued to see net operating income increase as regulated rentals turned over and rose.

The activity in New York City’s multifamily market has illustrated some interesting trends. If we annualize citywide activity in the sector through August 2011, we see that the number of apartment buildings sold is essentially flat from 2010. This year we are on pace for 552 multifamily property sales compared with 545 last year.

Interestingly, though, while the number of sales is essentially flat, the dollar volume is projected to be up significantly as we are on pace for approximately $3.8 billion of multi-family transactions versus only about $2.5 billion last year. In 2009, this figure was $1.3 billion. This trend shows that larger, well-located, assets are selling relative to last year. If we look at the value of these transactions, thus far in 2011, the average price per square foot for a multifamily building has been $232, up 6 percent from the $218 average in 2010. While this is a modest increase, it does show that value is rising.

Within the multifamily marketplace, there are two distinct asset classes in New York: walk-up buildings versus properties with elevators. While this difference is not meaningful in much of the rest of the country, it is very significant in New York City.

Looking at performance of walk-up buildings citywide, the number of buildings sold thus far in 2011 is on pace to be 4 percent higher than last year’s total. We expect 430 properties to trade this year versus the 415 in 2010. The dollar volume of sales within this sector is up 12 percent over the $827 million in walk-up sales last year as we are on pace for $926 million in 2011.

Looking at the elevator sector, the number of buildings sold in 2011 is on pace to be about 8 percent lower than the 131 properties sold citywide last year. Annualizing sales activity through August of 2011 shows that we are on pace for 120 properties sold this year. In terms of the dollar volume of these sales, there is a substantial increase anticipated as there were about $1.8 billion of elevator buildings sold last year and we have already achieved nearly that amount in 2011. Annualizing year-to-date activity shows that we are on pace for about $3 billion of elevator building sales this year, a 62 percent increase.

— Robert Knakal, chairman of New York City-based Massey Knakal Realty Services

Office

Over the past few months, the smaller spaces at the top of Manhattan’s trophy office buildings have performed the best out of all other market segments. The top end of the market has shown steady improvement throughout the year and continues to outpace the rest of the city.

This summer, Manhattan’s trophy office buildings posted a 10 percent increase in average asking rental rates, which rose to $74.95 per square foot in July 2011 from $68.09 per square foot 7 months earlier. That was only the second increase in office rents recorded by the city’s top quality product since spring 2008.

It remains to be seen if there is enough demand for space at Manhattan’s trophy addresses to push rates any higher. If market remains volatile and asking rents begin to decline, the first drops in rates could be seen in the trophy sector.

In Midtown, strong leasing volume continues to outpace the amount of space being returned to the market. The heavy activity pushed Class A vacancy rates down for the fifth straight month, falling to 11.4 percent in July 2011 from 12.4 percent in April 2011. Average asking rental rates for the submarket’s Class A office buildings surpassed $69 for the first time since September 2009, finishing at $69.02 per square foot in July. Rates for Class A Midtown office spaces have risen by nearly 6 percent since the beginning of the year.

Midtown South remains one of the tightest office markets in the entire country. The submarket, which enjoyed a steady decline in vacancy rates for much of the year, saw a slight uptick in vacancy rates this summer. The submarket saw Class A vacancy rates increase to 6.7 percent in July 2011 after posting five straight months of decreases in Class A vacancy rates drop from 8.2 percent in February 2011. Average asking rental rates for Class A space in Midtown South rose to $49 per square foot in July 2011. Pricing is the highest in the Greenwich Village area at $68.01 per square foot, rivaling the Times Square submarket in Midtown.

Continued tenant interest in Lower Manhattan has helped the area remain in equilibrium. In the next several years, however, a large amount of office space is expected to come to market, and that will likely push vacancy rates into the double-digits.

For now, vacancy rates for Lower Manhattan’s Class A buildings have remained stable. The submarket’s high-end product posted a vacancy rate of 9.1 percent in July 2011 compared with a vacancy rate of 9.8 percent in April 2011. Class A rents in Lower Manhattan have not changed significantly in the 12 months, reaching $41.72 per square foot in July 2011 versus $41.16 per square foot in July 2010.

— James Delmonte, Jones Lang LaSalle’s vice president and director of research for the New York Region

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