12/02/08

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Midtown-Downtown gap narrows with big leases

Several big deals sealed in Lower Manhattan in 2005 are shrinking the chasm between the Downtown and Midtown leasing markets as commercial rents prepare to climb throughout Manhattan.

The largest transaction in February took place Downtown when the law firm Fried Frank Harris Shriver & Jacobson signed on to renew and expand for 380,000 square feet at One New York Plaza.

Several other big deals, including Standard & Poor's expansion by 66,000 square feet at 55 Water St., are putting Downtown on the map again, as vacancy rates for Class A office space in that market inched down from 13.4 percent to 13.2 percent, according to Colliers ABR.

"Downtown has really been where the excitement has been in the last 90 days," said John Maher, an executive vice president at CB Richard Ellis. "A couple of other Midtown to Downtown transactions are in the works right now that are substantial."

Downtown

Robert Sammons, director of research at Colliers, said he expected vacancy rates Downtown, below Canal Street and Chambers Street, to plummet even further, perhaps by one or two percentage points, in the coming March statistics.

"There are definitely some big blocks of space being gobbled up right now Downtown," he said, referring specifically to Bowne & Co.'s 200,000-square-foot lease at 55 Water St. and the Securities and Exchange Commission's move into 235,000 square feet of space at 3 World Financial Center.

Even though February's statistics don't necessarily reflect it, rents should start to soar in inverse relationship to dropping vacancy rates. Whether it's a function of statistics or of more expensive prime space being snapped up first, leaving less expensive space in the inventory, apparent growth in rents can lag behind decreases in inventory.

Brokers on the ground say they're seeing proof of escalating prices, from bidding wars to landlords raising the rents in the middle of transactions.

"I don't think you're going to see it from closed transactions yet, but the anecdotal evidence is rents are going up," said William Shanahan, an executive vice president at CB Richard Ellis.

Midtown

Last month, the 1.1-million-square-foot Verizon building at 1095 Sixth Ave. was reportedly close to being sold, after a third round of bidding, for more than $500 million to Equity Office Properties, the Chicago- based REIT headed by Sam Zell.

Shanahan, who marketed the building along with Robert ("Mr. Big") Alexander and Darcy Stacom, said he couldn't comment on the deal. But other brokers are watching it closely.

"It's going to be a very exciting bellwether of the market to watch from the time they select the owner to the time that they lease it out," Maher said.

Midtown saw some substantial deals clinched in February, from Polo Ralph Lauren's expansion by 195,000 square feet at 625 Madison Ave. to Citibank N.A.'s lease for 176,000 square feet at 731 Lexington Ave. The class A vacancy rate in Midtown continued to fall, to 8.3 percent from 8.4 percent in January, according to Colliers. The average asking rent wriggled upward to $57.15 from $57.10 per square foot.

Sammons said two ends of the market are seeing heavy activity.

"There's pressure on the large blocks of space that are disappearing due to financial services and law firms," he said. "And on the other end, with the small boutique firms, hedge funds and the like, taking the really expensive, high-end spaces on Park Avenue."

But one factor still irking some market researchers is the lack of job growth to support an avalanche of leasing carried out by financial services companies, law firms and business services firms.

"That's what everyone's wondering," Maher said. "Where are the jobs to support this activity?"

Some believe financial services firms, which cut themselves to the bone in the downturn after Sept. 11, 2001, are leasing to get current employees out of cramped quarters and in anticipation of future hiring over the course of the year. And those firms, along with law firms, are hedging against future rent increases.

"It takes a year from the time you start thinking of space to the time you can actually get somebody in there," Maher said. "So people are acquiring space for a year from now."

Midtown South

Colliers found the Class A vacancy rate in Midtown South was 6.7 percent in February, down from 7.2 percent the month before. Those vacancy numbers are significantly lower than Downtown and Midtown because Midtown South has a much smaller stock of class A space.

A separate report by Newmark, using 12- month projected availability rates, found Midtown South, from Canal Street to the mid-30s, is thriving. Newmark discovered that Midtown South's rate inched below Midtown's in February, declining from 10.9 to 10.5 percent. It has not dropped so low since June 2001.

"This is a healthy market," Maher said. "Tenants have alternatives if landlords get greedy, and landlords don't have to give away the store, because there are plenty of tenants out there."