Midtown Manhattan Office Market Outperforms Downtown in Q2

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According to JLL, midtown continued to outperform the rest of Manhattan's office market in the second quarter of 2015, fueled by a robust increase in the number of large transactions. The submarket posted 21 leases in excess of 100,000 square feet year-to-date, compared with 14 in the first half of 2014. The heavy activity ensured the fifth consecutive month of tightening Class A vacancy rates in Midtown.

"Leasing activity fell sharply in the second quarter as both Downtown and Midtown South struggled to keep pace with the heavy volume seen this past year," said Tristan Ashby, Vice President and Director of New York research. "Downtown saw the slowest two-quarter period since the first half of 2009 and only one large-block lease has been signed in Midtown South, compared with six through the first half of last year."

New developments in Midtown continued to attract attention, with Skadden, Arps, Slate, Meagher & Flom LLP and Nike Inc. signing commitments for new product under construction, while several other tenants are rumored to be seriously considering Hudson Yards. In the largest lease of the quarter, law firm Skadden announced it would relocate to 538,321 square feet at 1 Manhattan West from 4 Times Square when construction is complete in 2018. Athletic apparel and footwear company Nike will relocate its offices from 111 Eighth Avenue to 147,936 square feet in the mixed-use tower under construction at 855 Avenue of the Americas.

Other significant leasing activity in the second quarter of 2015 included Morgan Stanley's renewal of 414,759 square feet at 750 Seventh Avenue, Bloomberg L.P.'s commitment for 254,556 square feet at 919 Third Avenue, Foot Locker Inc.'s relocation to 145,000 square feet at 330 W 34th Street and WeWork's commitments for new locations in 180,000 square feet at 1460 Broadway and 136,118 square feet at 315 W 36th Street.

Midtown's overall vacancy rate fell to 9.6 percent this quarter, a decrease of 4.0 percent (or 0.4 percentage points) from 10.0 percent in the first quarter of the year. Year-over-year, the submarket's overall vacancy rate dropped 10.3 percent from 10.7 percent at midyear 2014. The Class A vacancy rate declined 5.5 percent (or 0.6 percentage points) to 10.3 percent in the second quarter of 2015 from 10.9 percent the previous quarter. Year-over-year, Midtown's Class A vacancy rate dropped 10.4 percent (or 1.2 percentage points) from 11.5 percent in the second quarter of 2014.

Overall average asking rents in Midtown rose to $72.21 per square foot this quarter, an increase of less than 1.0 percent from $71.60 per square foot in the first quarter of the year. The submarket's overall rates grew 3.4 percent during the past 12 months from $69.81 per square foot at midyear 2014. Class A average asking rents rose to $79.33 per square foot in the second quarter of 2015, an increase of 1.2 percent from $78.42 per square foot in the previous quarter. Year-over-year, Midtown's Class A rates rose 3.1 percent from $76.96 per square foot in the second quarter of 2014.

The strong deal volume in Midtown helped drive down overall vacancy rates. Manhattan's overall vacancy rate fell slightly to 9.7 percent this quarter, a decrease of 3.0 percent (or 0.3 percentage points) from 10.0 percent in the first quarter of the year. Year-over-year, the city's overall vacancy rate decreased 8.5 percent (or 0.9 percentage points) from 10.6 percent at midyear 2014. New York's Class A vacancy rate fell to 10.6 percent in the second quarter of 2015, a decrease of 3.6 percent (or 0.4 percentage points) from 11.0 percent the previous quarter. Year-over-year, the city's Class A vacancy rate declined 7.8 percent (or 0.9 percentage points) from 11.5 percent in the second quarter of 2014.

Overall average asking rents in New York rose to $67.63 per square foot this quarter, an increase of 1.3 percent from $66.74 per square foot in the first quarter of the year. Year-over-year, the city's overall rates grew 4.7 percent from $64.57 per square foot at midyear 2014. Class A average asking rents grew to $74.73 per square foot in the second quarter of 2015, rising 1.1 percent from $73.90 per square foot the previous quarter. Year-over-year, Manhattan's Class A rates rose 4.8 percent from $71.28 per square foot in the second quarter of 2014.

Midtown South

Slower velocity continued through the second quarter despite strong demand and touring activity on the part of creative tenants. No leases were reported in excess of 100,000 square feet this quarter. Year-to-date, only one large-block lease has been signed in Midtown South compared to six through the first half of this past year. Although subleases drove leasing activity in the submarket in the first quarter, new deals accounted for the majority of activity in Midtown South at midyear 2015.

In the largest lease of the quarter, PayPal committed to 95,000 square feet at 95 Morton Street to accommodate its recent spin-off as a separate company from eBay Inc. Anheuser-Busch Cos. LLC closed a 75,021-square-foot lease at the newly renovated 119 West 24th Street to house the beer maker's advertising and marketing team. This follows a recent trend of traditional companies opening offices in Midtown South, as MasterCard Inc., Target Brands Inc. and Cadillac have all recently signed leases in the submarket.

Midtown South's overall vacancy rate rose to 7.2 percent this quarter, an increase of 18.0 percent (or 1.1 percentage points) from 6.1 percent in the first quarter of the year. Year-over-year, the submarket's overall vacancy rate fell 6.5 percent (or 0.5 percentage points) from 7.7 percent at midyear 2014. The Class A vacancy rate rose to 6.8 percent in the second quarter of 2015, an increase of 11.5 percent (or 0.7 percentage points) from 6.1 percent in the previous quarter. Year-over-year, Midtown South's Class A rate grew 17.2 percent (or 1.0 percentage points) from 5.8 percent in the second quarter of 2014.

Despite the uptick in vacancy, options remain limited in Midtown South, giving building owners leverage to continue to escalate asking rents to new levels. Overall average asking rents in Midtown South rose to $68.03 per square foot this quarter, an increase of 4.0 percent from $65.39 per square foot in the first quarter of the year. Year-over-year, the submarket's overall rates grew 13.2 percent from $60.09 per square foot at midyear 2014. Class A average asking rents fell slightly to $79.24 per square foot in the second quarter of 2015, a decrease of less than 1.0 percent from $79.97 per square foot in the previous quarter. Year-over-year, Midtown South's Class A rates rose 2.8 percent from $77.08 per square foot in the second quarter of 2014.

Downtown

Lower Manhattan continued to face a slowdown in leasing activity in the second quarter of the year. The submarket posted an overall deal velocity of just 1.6 million square feet, which represents the lowest activity recorded over a two-quarter period since the first half of 2009. Twentieth Century Fox / News Corp. signed a letter of intent to relocate from 1211 Avenue of the Americas to anchor the proposed 2 World Trade Center for as much as 1.4 million square feet. Other relocations will likely push leasing volume considerably higher in the coming months. While none of these will match last year's large transactions at Brookfield Place, several leases are likely to close in the 75,000- to 200,000-square-foot range by summer's end.

With few new large blocks of available space added to Downtown's inventory in recent months, even the limited leasing activity recorded drove down vacancy rates. Lower Manhattan's overall vacancy rate fell to 11.9 percent this quarter, a decrease of 4.8 percent (or 0.6 percentage points) from 12.5 percent in the first quarter of the year. Year-over-year, the submarket's overall vacancy rate dropped 1.7 percent (or 0.2 percentage points) from 12.1 percent at midyear 2014. The Class A vacancy rate fell to 13.1 percent in the second quarter of 2015, a decrease of 3.0 percent (or 0.4 percentage points) from 13.5 percent in the previous quarter. Downtown's Class A vacancy rate rose less than 1.0 percent (or 0.1 percentage points) from 13.0 percent a year ago.

Lower Manhattan rents increased for the fourth consecutive quarter, bringing rates to new highs for both Class A and Class B spaces. Ten Class A buildings and 15 Class B buildings raised rents from the first quarter to the second quarter, while only five Class B buildings lowered rents. Asking rents in the Class A market increased $5.00 to $62.16 per square foot year-over-year, and the Class B market increased $8.07 to $47.42 per square foot year-over-year.

Overall average asking rents Downtown rose to $57.05 per square foot this quarter, an increase of 1.4 percent from $56.25 per square foot in the first quarter of the year. Year-over-year, the submarket's overall rates grew 7.9 percent from $52.85 per square foot at midyear 2014. Class A average asking rents rose to $62.16 per square foot in the second quarter of 2014, an increase of 1.4 percent from $61.33 per square foot in the previous quarter. Year-over-year, Lower Manhattan's Class A rates rose 8.7 percent from $57.16 per square foot in the second quarter of 2014.