Jones Lang LaSalle


Asking rents don't tell whole story
Fewer concessions push up total price; Class B also rises
By Andrew Marks
Published on May 15, 2006

Taconic Investment Partners hasn't raised the asking rent at 450 Park Avenue much in the last 12 months. But any prospective tenants hoping to get a deal at the Class A building on the corner of East 57th Street and Park Avenue will be disappointed.

New tenants have been signing leases at rates about 15% higher than in 2005, notes Gregg Knoop, a Taconic senior vice president. The effective rent rate has gone up even more.

"A year ago, we were doing prebuilds costing us $80-plus per square foot, with no contribution from the tenant," says Mr. Knoop. "Today, our tenants are picking up a substantial cost of improvements."

The few new tenants coming in, he adds, are happy to get those terms, because the building has a 2% vacancy rate.

The statistics for asking rents all over midtown Manhattan paint a picture of flat, even falling prices. At the end of 2004, the average asking rent in the high-end midtown plaza district was $71.80 per square foot. At the end of this year's first quarter, the "ask" was $69.25, according to real estate tracker CoStar Group Inc.

But the truth is quite different. With supply running tight and demand still rising, those numbers are misleading. Midtown rents for Class A space have risen by as much as 15% in the last six months alone, reports Ken Krasnow, director of tristate brokerage at Trammell Crow Co.

"Even that doesn't paint the true picture," he says, because in addition to raising rents, owners have sharply reduced concessions, such as tenant improvement letters and rent-free periods typically offered to incoming tenants.

"You talk to landlords, and they tell you they're not focused on asking rents, because what they asked a month ago has no meaning in such a hot market," he says.

A 40% increase

When factoring in the true costs for new tenants, the effective rent per square foot at top buildings such as 527 Madison Ave. has essentially risen by as much as 40% in the past year, according to Mr. Krasnow.

Doug Hercher, a principal at Sonnenblick-Goldman Co., notes that asking rents at trophy properties such as the Seagram Building have always been high. "But the actual rent always traded off the `ask' at a discount. Now, landlords aren't discounting," he says. At top properties, landlords are coughing up no more than $20 to $40 per square foot in tenant improvement work, compared with $40 to $60 a year ago.

"The only numbers that count are the `taking' rents, and those are definitely on the rise," says Dean Shapiro, CB Richard Ellis' executive managing director in charge of the New York operation.

Last year, says tenant broker Kenneth Siegel at Jones Lang LaSalle, "you'd see maybe one or two deals in the entire year at trophy buildings in which the tenants didn't care what they had to pay." Now there are a couple of those deals every quarter for well in excess of $100 per square foot.

For example, at the end of 2004, Wachovia Corp. took space in the Seagram Building for $76 per square foot. It recently expanded there at $100 a square foot.

The ultratight Class A midtown market is lifting Class B space, as well. Two years ago, David Levy, a principal at Adams & Co., leased 4,000 square feet at 48 W. 37th St., a Class B building. "I got $17.50 per square foot and kicked in 15 months of free rent plus another couple for construction, which I built," he says.

Mr. Levy just re-rented the space at $25 per square foot--to a publisher whose Class A space was rocketing to $46 a square foot from $28--with only nine rent-free months and no construction.

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