Jones Lang LaSalle
Office bidding wars
Midtown demand pushes up prices, speeds up deals
By Steve Garmhausen
Published on May 15, 2006
It's long been axiomatic that tenants should steer clear of bidding wars. But that rule is out the window in the current midtown market. Tenants must assume they will be going up against multiple bidders on any given chunk of space.
"There's no guarantee you'll find another space that will be equally suitable--or that you won't end up in a bidding war if you do," says Michael Cohen, chief executive of brokerage firm GVA Williams. "You might not be able to afford to walk away.
A strong economic outlook, lack of new construction, and tenants' reluctance to move to alternative neighborhoods have combined to tighten the midtown office market to a point not seen since 2000. Demand from the financial sector is pushing the area market to standing room only, says Dan Horowitz, executive managing director at Studley.
"There is lots of money being made by the service industries that support the real estate economy," says Mr. Horowitz. "Overall, there is a positive feeling among business leaders that the economy is going to continue to do well."
That doesn't bode well for firms looking to expand in a neighborhood where there is a dearth of new buildings. What new construction is occurring is largely spoken for: The New York Times Building at West 41st Street and Eighth Avenue and the Bank of America building near Bryant Park will be occupied mostly by their namesake tenants, for instance.
Fewer vacancies
As a result, the average asking rent in April was $57 a square foot, up more than $5 from the same time last year, according to research firm CoStar Group Inc. The vacancy rate for midtown's 200 million square feet of Class A office space was only 4.8% in April--down from 6.5% just a year ago.
Rents for Class A space now regularly exceed $100 a square foot in prime properties, such as 9 W. 57th St. and the General Motors Building on Fifth Avenue. The top floors of the Citigroup Center have now joined the $100-and-over club, says Frank Doyle, a managing director with Jones Lang LaSalle. "The last two deals we've closed [there] have had taking rents in the triple digits," he says.
The crunch has also taken a bite out of concessions--rent abatements and allowances for building out raw space. Space improvement allowances have fallen to an average of $37 a square foot in March of this year compared with $40 a square foot in March 2004. In the same period, landlords went from waiving seven months' rent to forgoing six, according to CB Richard Ellis.
And the pressure is only building now that tenants are engaging in a space race, says Gregg Knoop, senior vice president of real estate for Taconic Investment Partners, which owns and operates office and residential buildings in midtown and elsewhere. Knowing that their leases are expiring and that they want to remain in the area, tenants are making more forward commitments.
"We are seeing a fair amount of traffic from 10,000-square-foot tenants that are making commitments nine to 18 months in advance," Mr. Knoop says.
Bidding wars are making deals not only more expensive but faster--closings take place in one month rather than three, for example, adds Mr. Doyle.
Even short-term subleases outside the prime locations are drawing a crowd, says Barry Zeller, executive director at Cushman & Wakefield Inc. In late March, Mr. Zeller was arranging a 30-month Third Avenue sublease for a law firm when a financial firm jumped in and pushed the price up by $4 a square foot. The law firm ended up paying $51 per foot.
Some say that midtown is not as tight as others claim. On a scale where 1 is a recession and 10 is the booming market of 2000, midtown is about a 6.5, says David Levy, a principal at brokerage firm Adams & Co.
It's in the landlords' and brokers' interest to hype the market, because their profits are based on rent levels, he argues. And by tossing around rent figures for Class A space--the newest and most technologically advanced--they overlook more than half of the district's office space, which falls into the B and C categories, Mr. Levy adds.
"I think that's the most important part of the conversation," he says.
Lots of space downtown
Not all the companies in midtown need to be there. Plenty of space is available nearby--in particular, the millions of square feet downtown could become more attractive now that there is real action at Ground Zero. Until now, few businesses have been willing to commit to buildings such as the 1.7 million-square-foot 7 World Trade Center.
A big reason executives balk at moving firms to lower Manhattan is that getting there from homes on the Upper East and Upper West Sides, not to mention Westchester or Fairfield County, Conn., is inconvenient, says GVA Williams' Mr. Cohen. But he expects that high rents will start forcing companies away from midtown soon. Certainly, rents downtown--which averaged less than $36 a square foot in March, according to CB Richard Ellis--could be a lure.
"I think there is a good argument that many of them will go downtown," Mr. Cohen says. "Next would be the New Jersey waterfront, and now Long Island City actually has a shot at fulfilling its potential."
OUT OF STEP
Landlords in other U.S. cities also charge tenants for common space, but they follow standards promulgated by the Building Owners and Managers Association, a century-old international trade group. Those charges tend to be 10 percentage points lower than they are in New York, and the figures are more closely based on a tenant's share of the building's square footage.
Comments? cnyb@crain.com
Office bidding wars
Midtown demand pushes up prices, speeds up deals
By Steve Garmhausen
Published on May 15, 2006
It's long been axiomatic that tenants should steer clear of bidding wars. But that rule is out the window in the current midtown market. Tenants must assume they will be going up against multiple bidders on any given chunk of space.
"There's no guarantee you'll find another space that will be equally suitable--or that you won't end up in a bidding war if you do," says Michael Cohen, chief executive of brokerage firm GVA Williams. "You might not be able to afford to walk away.
A strong economic outlook, lack of new construction, and tenants' reluctance to move to alternative neighborhoods have combined to tighten the midtown office market to a point not seen since 2000. Demand from the financial sector is pushing the area market to standing room only, says Dan Horowitz, executive managing director at Studley.
"There is lots of money being made by the service industries that support the real estate economy," says Mr. Horowitz. "Overall, there is a positive feeling among business leaders that the economy is going to continue to do well."
That doesn't bode well for firms looking to expand in a neighborhood where there is a dearth of new buildings. What new construction is occurring is largely spoken for: The New York Times Building at West 41st Street and Eighth Avenue and the Bank of America building near Bryant Park will be occupied mostly by their namesake tenants, for instance.
Fewer vacancies
As a result, the average asking rent in April was $57 a square foot, up more than $5 from the same time last year, according to research firm CoStar Group Inc. The vacancy rate for midtown's 200 million square feet of Class A office space was only 4.8% in April--down from 6.5% just a year ago.
Rents for Class A space now regularly exceed $100 a square foot in prime properties, such as 9 W. 57th St. and the General Motors Building on Fifth Avenue. The top floors of the Citigroup Center have now joined the $100-and-over club, says Frank Doyle, a managing director with Jones Lang LaSalle. "The last two deals we've closed [there] have had taking rents in the triple digits," he says.
The crunch has also taken a bite out of concessions--rent abatements and allowances for building out raw space. Space improvement allowances have fallen to an average of $37 a square foot in March of this year compared with $40 a square foot in March 2004. In the same period, landlords went from waiving seven months' rent to forgoing six, according to CB Richard Ellis.
And the pressure is only building now that tenants are engaging in a space race, says Gregg Knoop, senior vice president of real estate for Taconic Investment Partners, which owns and operates office and residential buildings in midtown and elsewhere. Knowing that their leases are expiring and that they want to remain in the area, tenants are making more forward commitments.
"We are seeing a fair amount of traffic from 10,000-square-foot tenants that are making commitments nine to 18 months in advance," Mr. Knoop says.
Bidding wars are making deals not only more expensive but faster--closings take place in one month rather than three, for example, adds Mr. Doyle.
Even short-term subleases outside the prime locations are drawing a crowd, says Barry Zeller, executive director at Cushman & Wakefield Inc. In late March, Mr. Zeller was arranging a 30-month Third Avenue sublease for a law firm when a financial firm jumped in and pushed the price up by $4 a square foot. The law firm ended up paying $51 per foot.
Some say that midtown is not as tight as others claim. On a scale where 1 is a recession and 10 is the booming market of 2000, midtown is about a 6.5, says David Levy, a principal at brokerage firm Adams & Co.
It's in the landlords' and brokers' interest to hype the market, because their profits are based on rent levels, he argues. And by tossing around rent figures for Class A space--the newest and most technologically advanced--they overlook more than half of the district's office space, which falls into the B and C categories, Mr. Levy adds.
"I think that's the most important part of the conversation," he says.
Lots of space downtown
Not all the companies in midtown need to be there. Plenty of space is available nearby--in particular, the millions of square feet downtown could become more attractive now that there is real action at Ground Zero. Until now, few businesses have been willing to commit to buildings such as the 1.7 million-square-foot 7 World Trade Center.
A big reason executives balk at moving firms to lower Manhattan is that getting there from homes on the Upper East and Upper West Sides, not to mention Westchester or Fairfield County, Conn., is inconvenient, says GVA Williams' Mr. Cohen. But he expects that high rents will start forcing companies away from midtown soon. Certainly, rents downtown--which averaged less than $36 a square foot in March, according to CB Richard Ellis--could be a lure.
"I think there is a good argument that many of them will go downtown," Mr. Cohen says. "Next would be the New Jersey waterfront, and now Long Island City actually has a shot at fulfilling its potential."
OUT OF STEP
Landlords in other U.S. cities also charge tenants for common space, but they follow standards promulgated by the Building Owners and Managers Association, a century-old international trade group. Those charges tend to be 10 percentage points lower than they are in New York, and the figures are more closely based on a tenant's share of the building's square footage.
Comments? cnyb@crain.com
posted by Jones Lang LaSalle NJ News Blog at 10:33 AM
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