Overview Effective Rent Indicator: Midtown $67.74 ↑ Midtown South $61.68 ↑ Downtown $43.57 ↑
The second quarter of 2015 was packed with activity, and market experts were not surprised. The most impressive statistics include Manhattan Class A average effective rents approached $70
PSF, 8 leases signed over 100k SF in Midtown, vacancy dropped to 6% in Midtown South, and the Downtown submarket had the lowest concession packages.
Overall average effective rents in Manhattan increased $4.45 to $63.38 PSF. Midtown South led the charge with effective rents increasing 10% after recovering from a slow-down last quarter.
Midtown Class B office space lagged in Q2 with effective rents dropping 4.1% to $48.52 PSF.
Midtown – New Leases Drive Up Concessions
Class A buildings in Midtown closed out the first half of the year with impressive gains. After rising $3.67 in Q1, overall effective rents increased another $1.61 to $73.59 PSF in Q2. Eight tenants signed deals over 100k SF including Skadden Arps Slate Meagher’s anchor lease at 1 Manhattan West and Kaye Scholer’s lease at 125 West 55th Street.
The percentage of new leases in Midtown increased considerably in Q2. As a consequence, concession packages rose 100bp to 9.6% of the total lease value. The large portion of new leases contributed to the increase as new leases tend to include bigger incentive packages for build outs.
The trend of larger concessions played out at Boston Properties’ spec project at 250 West 55th Street. The 38-story glass tower west of Columbus Circle that Al Jazeera and George Soros’ investment firm call home added three new tenants with above average concession packages, ranging from 11%-16% of the total lease value. Lincoln Financial Group leased just under 6k SF at over $100 PSF on the 33rd floor; Watson, Farley & Williams took 30k SF on the 30th and 31st floors; and Lyrical Partners leased 16k SF at over $100 PSF on the 37th floor.
Midtown South – TAMI Tenants Push Rents Higher
After experiencing a slower than expected start to the year, effective rents in Midtown South have recovered quite a bit to continue the uptrend from the end of 2014. Overall rents in the submarket increased $6.32 quarter-over-quarter to $61.68 PSF.
The $60 rental mark seemed like a tough hurdle to cross towards the end of last year into this year. Now that rents have surpassed the mark, we expect rents to continue trending upwards through the end of the year as vacancy continues to fall in this submarket. Overall vacancy fell to almost 6%, making it one of the tightest office submarkets in the country.
During the quarter, 51 Astor became 100% leased when IBM signed a 25k SF expansion in the high $90s PSF. IBM used its leverage in the building to negotiate a discount with landlord Minskoff Equities, paying lower rent compared with the previous four leases in the building which were all signed above $100 PSF.
PayPal got booted out of 625 Sixth Avenue after splitting from parent company eBay, but was able to secure an attractive deal despite the competitive Midtown South submarket. The company ended up with 95k SF over four floors at Brickman Associates’ 95 Morton Street in the West Village. Asking rents in the building were in the $80’s PSF; however, PayPal secured a deal in the mid $70’s PSF. PayPal has also started trading under a new NASDAQ ticker symbol - $PYPL.
Downtown – Low Concessions, Effective Rents Rise
The good news continues for Downtown landlords as overall average effective rents have increased quarter-over-quarter since the start of 2014. Effective rents increased $1.94 to $43.57 PSF, while concession values were unchanged at 8.3% of the total lease value, the lowest concessions of all Manhattan submarkets. Concession packages should increase through the end of the year as leasing managers attempt to counter the uptick in vacancy, now over 10%. A higher percentage of new leases shows the continued adoption of Downtown as a viable option for priced out tenants throughout the city.
One of largest deals in Q2 was Ironshore’s 16 year, 100k SF lease at 28 Liberty Street with effective rent in the low $50s PSF. Fosun, a large Chinese investment company, purchased 28 Liberty, formerly known as 1 Chase Manhattan Plaza, in 2013 from JPMorgan Chase for $725million. Fosun’s 20% interest in Ironshore likely played a big part in Ironshore’s decision to leave 1 State Street and sign at 28 Liberty.
The Downtown submarket tenant diversity is increasing, as exemplified by 1 World Trade Center. Mixed in with financial service tenants, media conglomerates, and US Government agencies is Tinypass, a small tech company helping media companies build their brand and revenue streams. One of the building’s most famous tenants, Conde Nast, is a potential customer for Tinypass.
CompFacts – WeWork Welcomes Workers While Wagering Wealth
WeWork, the co-working startup, darling of the venture capital world, has been the talk of the
town amongst real estate professionals over the past year. Six months after closing a funding round at a $5 billion valuation in December 2014, WeWork raised another round at a $10 billion valuation. The funding has supported explosive growth of locations in New York City and beyond.
Since the start of 2015, WeWork has signed in excess of 850k SF throughout Manhattan, Brooklyn,and Queens. With these recent leases, WeWork will occupy almost 2 million SF in New York City making it one of the biggest tenants in the city behind Citigroup, Viacom, and Bank of America.
Despite the recent success, WeWork has a few doubters. Their explosive expansion in the City has raised concerns about their lofty valuation, future growth prospects, and hefty lease liabilities. WeWork has been signing long term leases as New York City leasing markets have experienced big gains over the past few years. If the market goes south, WeWork is on the hook for tens of millions of dollars in rent. A downturn in the economy may stifle demand, but WeWork’s costs associated with leasing are growing when you factor in escalations.
Young companies today value flexibility, beautiful offices, extra amenities, collaborative work spaces, and prime office locations. WeWork attempts to answer all of these demands. They are betting that the shift in tenant demands and their cool factor will be enough to attract new tenants even if the market cools down. Time will tell if this is the start of something much larger or the beginning of the end.
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The information contained in this report was gathered from CompStak users and other sources that we consider reliable. While we strive for perfection, this report may contain errors or omissions and is presented without any warranty or representations as to its accuracy.
*Effective Rent takes into consideration the rent paid for every year of the lease, as well as landlord concessions such as free months and tenant improvement allowance.