MARKET HIGHLIGHT, SEPTEMBER 2008
NEW YORK CITY BOROUGHS MARKET HIGHLIGHTS
Manhattan Office Market
Manhattan Office Market Statistics
• Builders will bring 2.3 million square feet of office space online this year.
• Vacancy is forecast to end the year at 6.2 percent.
• Asking rents are projected to climb 6.2 percent this year to $67.52 per square foot.
• Effective rents will add 6.4 percent to $59.94 per square foot.
• The median price of properties sold during the past year is $648 per square foot, 27 percent more than the median price 1 year earlier.
Source: Marcus & Millichap Second Quarter Manhattan Office Report
The implosion of the credit markets and the ongoing write-downs and layoffs amongst the world’s largest banks has stopped the New York City commercial market in its tracks. The Manhattan office market reached its peak in the real estate cycle during the first quarter, as available supply continued to increase and demand for space remained sluggish. In the second quarter, the overall vacancy rate climbed 70 basis points from the first quarter to 5.6 percent, the largest one-quarter vacancy increase since the fourth quarter of 2001.
Class A and Class B direct average asking rents both declined from last quarter, and although the decreases were minimal — $0.04 for Class A and $0.30 for Class B — expect asking rental rates to remain flat throughout the year. Negotiations are still in the landlords’ favor, but tenants are beginning to gain some leverage when compared to the last 3 years in this market.
Look for most landlords to keep rents steady and boost free rent and tenant improvement concessions. Concessions in Midtown have already increased compared to this time last year, with an average of an additional $3.00 per square foot in work being offered and one to two additional free months of rent included in the lease.
In addition to these changing trends, there has been an increase in available large blocks of space — 60 exist north of 100,000 square feet, more than doubling the amount available 1 year ago. Also, tenants have placed more than 1.5 million square feet of sublease space on the market since the start of the year. Demand for space is down, with leasing velocity through the first 6 months of the year down 19 percent compared to the same time last year.
The drop in demand is attributed mostly to the cutback in leasing from the financial services sector. In fact, this industry has been the primary seeker of space over the past 7 years, and has accounted for more than 30 percent of the markets activity. However, the industry as a whole has scaled back space requirements, and has only participated in 20 percent of the square feet leased this year.
With this sector not as active in leasing space as in previous years, an increase in demand from the advertising and legal services industries has propelled the professional services sector to the top in acquisitions of Manhattan office space. Accounting for 27.7 percent of the year’s leasing activity, the professional services sector has picked up some of the slack left behind by the financial services industry. Fueled by three transactions north of 400,000 square feet, the government sector has seen an increase in activity, accounting for 10.5 percent of the transactions completed this year, compared to 6 percent 1 year ago.
— Richard Persichetti is the client services manager of Grubb & Ellis.
Brooklyn Retail Market
Major National Retailers Flock to Brooklyn
Significant changes presently underway in Brooklyn are transforming the retail property market. Vacancy in retail properties remains in the low-5 percent range, although that rate may increase in the near term as older, local merchants exit and new, national chains move into the region. Meanwhile, rents are rising at a respectable pace across the entire market. However, the pace of rent growth in emerging areas such as downtown, Williamsburg and Park Slope, will likely exceed the marketwide rate by a considerable margin this year.
On the supply side, development activity is expected to accelerate in 2008, fueled by the openings of new residential buildings and the refurbishment of older properties. The large Atlantic Yards mixed-use project is slowly progressing, while another development, 502 Metropolitan Avenue, has begun to make its way through the construction pipeline. Big-box retailers continue to establish a presence in the borough. A 220,000-square-foot Target will anchor the under way Triangle at the Junction project. Also, a 346,000-square-foot IKEA in Red Hook is slated to open this summer. City Point, a mixed-use development in downtown Brooklyn, is slated for completion in 2010. It will boast more than 520,000 square feet of retail space for local and national retailers, 360,000 square feet of Class A office space and a mix of affordable and market-rate rental apartments.
Recent lease signings include Trader Joe’s at Court Street and Atlantic Avenue, Morton’s Steakhouse at 333-335 Adams Street for an undisclosed amount and Circuit City at Triangle at the Junction for $100 per square foot. Other national or regional retailers that recently took space in the borough include drugstore chain Duane Reade at 756 Myrtle Avenue for $50 per square foot. Also, Urban Outfitters recently occupied a space at 164-168 Atlantic Avenue. Street-level space in new, nearby buildings is being marketed at more than $90 per square foot. In addition to new retail space and residential construction, more office space is envisioned for the downtown area, and a surge of hotel development is only now reaching peak momentum.
In the investment arena, local buyers are sustaining an elevated level of activity. Storefronts with either a residential or an office component account for more than 80 percent of all properties changing hands, a trend that will endure during the near term, especially in light of strong housing demand. Among such assets, those measuring less than 5,000 square feet trade most frequently and also command the greatest prices. Investors, as well as owner-users, comprise the buyer pool in this segment of the market, and both are expected to support current valuations in the near term.
— J.D. Parker is the regional manager of the Brooklyn office of Marcus & Millichap Real Estate Investment Services.
New York City Boroughs Investment Sales Market
Once red hot, the New York City investment sales market has started to cool. Current investment activity is down roughly a third from just last year. The lack of available lending capital and the over cautiousness of banks are largely to blame as is the current wait-and-see attitude of buyers and sellers. Many banks have shied away from putting large loans together and have started joining forces with other banks to try to crank out the larger transactions. There has also been some interest from foreign investors coming in and taking advantage of the weakened dollar.
And while New York City is not the red-hot market that it was due to woes on Wall Street, the market is still sound and high-end projects in the better neighborhoods throughout Manhattan and the boroughs are still garnering attention from prospective buyers. Astoria in Queens, North Bronx near Fordham University in the Bronx, Brooklyn Heights and Park Slope in Brooklyn, and virtually any area below 96th Street in Manhattan are all viable areas for investors and developers.
However, some investors are turning their attention away from the high-end projects. In the Bronx, investors have been focusing on acquiring vacant sites for affordable housing developments to meet the need of those being priced out of Manhattan. I recently brokered a transaction with Destiny Housing, which purchased a vacant development site at 1070 Anderson Avenue in the Bronx for a future affordable housing project. The site totaled 41,000 buildable square feet and sold for $1.65 million. Another deal that I recently brokered in the Bronx was for two adjacent vacant sites totaling 62,400 buildable square feet. The two adjacent parcels were located at 878 and 886 Westchester Avenue and sold for $2.28 million. A good mix of retail is also shaping up alongside the residential development.
Recent rezonings in Harlem have set the neighborhood up for a flurry of future investment. The main retail strip in Harlem, 125th Street, was just rezoned to encourage further retail development and redevelopment as well as other uses. A new W Hotel is also set to come out of the ground in Harlem, as well as a 500,000-square-foot office building that is being developed by Vornado Realty Trust. The increased interest in this neighborhood has also made it a prime sight for future residential development. This year, I closed a $1.4 million sale of two contiguous vacant lots totaling 13,000 square feet at 51 and 53 East 128th streets. The location offers an excellent opportunity for a possible rental or condominium development.
Long Island City in Queens has been on the radar screen for some time, but the big question was always when exactly the projects were going to start ramping up. However, it looks as if the time has finally come and investors have set their sights on the neighborhood, as commercial real estate activity is finally underway. The income play in the strong neighborhoods in the boroughs remains solid. In a recent transaction that I brokered at 215-31 Hillside Avenue in Queens, the owner had owned the building for more than 30 years and was able to sell it for more than 11 times the gross rent multiplier — for just under a 6 percent capitalization rate. This transaction, amongst others Itzhaki has completed in New York City, shows the confidence that investors have in strong neighborhoods and in the income play for the long run.
— Shay Zach is a managing partner with Itzhaki Properties.
The “Jamaica Plan”
The “Jamaica Plan” is underway in the Jamaica neighborhood of Queens, New York City, as more retailers and businesses join the economic revitalization. Most recently, two new national bank branches opened in downtown Jamaica — Bank of America and Washington Mutual. In addition, the Greater Jamaica Development Corporation, in conjunction with NYC Economic Development Corporation, recently announced another important component of the neighborhood’s resurgence. New plans call for the creation of street-level retail space to be located under the Long Island Railroad’s Jamaica station on Sutphin Boulevard. The $12 million project will transform a blighted underpass into a retail corridor featuring 5,300 square feet of retail space. Much of the current development has been due in part to a major rezoning of 368 blocks in Jamaica, which was approved by the City of New York in September 2007. The rezoning will promote the creation of 3 million square feet of new office, retail and hotel space, 5,200 new units of housing and 9,500 jobs.
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