Hedge Fund Activity in Manhattan Office Market at Record High in 2014

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According to JLL's 2014 year-end Manhattan trophy office market report by Cynthia Wasserberger, the hedge fund industry was very active in New York City's office market last year.
 
At year-end 2014, the vacancy rate for Midtown's trophy building submarket dropped to 8.0% from 10.6% from the previous year. This decrease mirrors Midtown's general Class A vacancy rate which dropped to its lowest level since 2008: 10.7% (compared to 11.7% in 2013).
 
The Midtown average trophy asking rents for direct space increased 2.5% to $99.58 per sq. ft. from $97.29 at year-end 2013. This represents a 23% premium over Midtown's Class A asking rents which average at $80.86 per sq. ft. Asking rent growth was steepest at the top of the market in the Plaza District, where trophy rents rose 6.5% and broke $100 per sq. ft. for the first time since 2008, reaching $101.28 per sq. ft.
 
As predicted at the end of 2013, asking rents in the high-end market gained strength throughout the course of 2014. Tenants may want to prepare for similar growth in 2015, particularly on preferred floors in the best buildings. Tenants can expect the most desirable sector of the market - trophy tower floors (i.e. those above the 25th floor) - to continue to tighten. Vacancy on these trophy tower floors is a mere 4.1%, dropping from its 5.0% vacancy level in 2013.
 
Through 2014, Landlords continued to offer robust concession packages, allowing tenants to offset substantial upfront capital costs associated with building new office space, typically a barrier to relocating.
 
Deal Trends: $100 per sq. ft. Transactions
 
In 2014, 97 transactions were completed at starting rents of $100 per sq. ft. or higher. Over the past several years, the number of these $100+ deals has increased consistently and has finally exceeded the 2008 peak of 91 deals. Despite the ever-increasing number of these high-end deals, it should be noted that they represent a relatively small portion of the total leasing volume in Midtown Manhattan in 2014 (12%) - approximately 2.7 million sq. ft., yet significantly above the 1 million sq. ft. of top tier deals in 2013.
 
The average size of transactions that achieved starting rents of at least $100 increased to 28,583 sq. ft. This number is skewed upwards by several unusually large transactions that occurred in 2014. These three deals all exceeded 350,000 sq. ft. and were early renewal commitments with forward pricing. Excluding these three anomalies, the average size lowers to 16,415 sq. ft.
 
Other New York market trends include:
 

• The majority of these deals were completed by financial services tenants:

       - 32 hedge funds
       - 19 private equity firms
       - 25 other financial (investment banks, wealth management)
       - 21 other non-financial (legal, consulting, software)
            

• For the first time ever, buildings in Midtown South welcomed tenants at rents north of $100 per sq. ft. 51 Astor Place signed four deals over $100 per sq. ft. for a total of 63,096 sq. ft., and a new 56,000 rsf lease at 837 Washington Street in the Meatpacking District had a starting rent of $125 per sq. ft. 610 Broadway is another new entrant to the $100 club with its 27,601 sq. ft. lease, as well as 635 Avenue of the Americas, with a lease of approximately 10,000 sq. ft.

        

• There were 27 buildings in the $100 club last year, and 33 buildings in 2014, indicating a wider concentration of properties.

• 9 West 57th Street has achieved the highest starting rent in Midtown for the past several years, reaching $210 per sq. ft. in 2014.

• Since 2010, 375 Park Avenue (The Seagram Building) has attained the highest number of transactions with rents over $100 per sq. ft. - 14 transactions were completed in 2014, compared to 12 in 2013.

• Landlords with the largest number of $100+ deals are Boston Properties (19 deals - 1.1 million sq. ft.), RFR (17 deals - 124,145 sq. ft.), and Vornado (10 deals - 93,589 sq. ft.).

• The three largest deals were renewals and forward commitments ranging from 350,000 sq. ft. to 489,495 sq. ft.