Midtown Manhattan Trophy Buildings Post Rock Star Rental Growth Rates

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Midtown outperforms rest of New York office markets since 2010 bottom

According to global real estate consultant JLL, Midtown Manhattan office leasing activity outperformed the rest of the New York office market this year, claiming nine of the top 10 leases, despite recording fewer large-block transactions. There were 27 leases of 100,000 square foot or greater in Midtown this year vs. 33 in 2014. Morgan Stanley signed the largest lease this quarter to expand by 260,829 square feet at 1633 Broadway. The global financial services firm previously occupied roughly 60,000 square feet at the office building.

"The Midtown Trophy Index, a group of many of New York's most exclusive office buildings, has outperformed the rest of the submarket," said Tristan Ashby, Vice President and Director of New York research. "Average asking rents for Midtown trophy properties increased 6.5 percent in 2015 to $99.43 per square foot. Since the market bottom in 2010, Midtown trophy asking rents have recorded some of the highest growth rates in Manhattan at 38.9 percent."

Overall average asking rents in Midtown rose slightly to $73.19 per square foot this quarter, an increase of less than 1.0 percent from $72.90 per square foot in the third quarter of 2015. Year-over-year, the submarket's overall rates grew 4.1 percent from $70.31 per square foot in the fourth quarter of 2014. Class A average asking rents fell to $80.24 per square foot in the fourth quarter of 2015, a decrease of less than 1.0 percent from $80.31 per square foot the previous quarter. Year-over-year, Midtown's Class A rates rose 4.1 percent from $77.11 per square foot at year-end 2014.

Slow leasing volume throughout Manhattan in the fourth quarter of 2015 kept the submarket from recording a ninth consecutive monthly drop in Midtown Class A vacancy rates. After dropping below 10.0 percent for the first time in seven years during the previous quarter, Midtown's Class A vacancy rate rose back up to 10.4 percent this quarter. The submarket continued to post the lowest vacancy rates since the third quarter of 2008.

Midtown's overall vacancy rate rose to 9.9 percent this quarter, an increase of 6.5 percent (or 0.6 percentage points) from 9.3 percent in the third quarter of 2015. Year-over-year, the submarket's overall vacancy rate grew 2.1 percent (or 0.2 percentage points) from 9.7 percent in the fourth quarter of 2014. The Class A vacancy rate rose 6.1 percent (or 0.6 percentage points) to 10.4 percent in the fourth quarter of 2015 from 9.8 percent the previous quarter. Year-over-year, Midtown's Class A vacancy rate dropped 2.8 percent (or 0.3 percentage points) from 10.7 percent at year-end 2014.

Office leasing activity throughout Manhattan was slower in the fourth quarter of 2015 than is typical of year-end transaction volume and consistent with the lighter transaction volume the city has witnessed all year. Fewer large-block leases resulted in a 25 percent drop in leasing activity this year, compared with 2014. Tenants signed for around 28 million square feet of New York office space this year vs. about 38 million in 2014.

The number of large-block transactions -- 100,000 square feet or greater -- this year dropped 32 percent, with 36 large transactions signed this year compared with 53 in 2014, according to JLL. Large-block renewals plummeted by 65 percent, with just eight large renewals in 2015 compared with 23 this past year.

Manhattan posted fewer large-block leases mainly because renewals lagged far behind new transactions this year. New York vacancy remained tight despite the slowdown in leasing activity but was still essentially flat for the year. The market was strong enough for building owners to push for rent increases. Rents are up 5.3 percent for the year and in line with JLL's forecast; concessions, however, have risen in parallel with rents.

Fueled by slow leasing activity in the final quarter of the year, Manhattan's overall vacancy rate rose to 9.6 percent this quarter, an increase of 2.1 percent (or 0.2 percentage points) from 9.4 percent in the third quarter of 2015. Year-over-year, the city's overall vacancy rate grew 1.1 percent (or 0.1 percentage points) from 9.5 percent in the fourth quarter of 2014. The Class A vacancy rate rose 2.0 percent (or 0.2 percentage points) to 10.3 percent in the fourth quarter of 2015 from 10.1 percent the previous quarter. Year-over-year, Manhattan's Class A vacancy rate dropped 1.9 percent (or 0.2 percentage points) from 10.5 percent at year-end 2014.

Overall average asking rents in New York rose to $68.73 per square foot this quarter, an increase of less than 1.0 percent from $68.17 per square foot in the third quarter of 2015. Year-over-year, the city's overall rates grew 5.3 percent from $65.25 per square foot in the fourth quarter of 2014. Class A average asking rents rose to $75.71 per square foot in the fourth quarter of 2015, an increase of less than 1.0 percent from $75.36 per square foot the previous quarter. Year-over-year, Manhattan's Class A rates rose 5.6 percent from $71.68 per square foot at year-end 2014.

Midtown South

Strong demand, particularly from Manhattan's creative sector, has depleted the supply of 25,000-square-foot or larger blocks of space in Midtown South. These blocks equal 3.2 million square feet or 5.1 percent of the total Midtown South inventory. Year-to-date leasing activity, however, decreased 51.8 percent this year compared with 2014. The largest lease in the final quarter of the year was signed by Avenues: The World School for 85,421 square feet at 540 West 26th Street. Perkins Eastman renewed its 77,000-square-foot lease at 115 Fifth Avenue; and WeWork committed to the remaining 75,000 square feet at 524 Broadway, continuing the co-working provider's rapid expansion in Manhattan.

Midtown South's overall vacancy rate fell to 6.3 percent this quarter, a decrease of 6.0 percent (or 0.4 percentage points) from 6.7 percent in the third quarter of 2015. Year-over-year, the submarket's overall vacancy rate dropped

8.7 percent (or 0.6 percentage points) from 6.9 percent in the fourth quarter of 2014. The Class A vacancy rate declined 12.5 percent (or 0.8 percentage points) to 5.6 percent in the fourth quarter of 2015 from 6.4 percent the previous quarter. Year-over-year, Midtown South's Class A vacancy rate increased 43.6 percent (or 1.7 percentage points) from 3.9 percent at year-end 2014.

After three consecutive years of double-digit annual rent growth, average starting rents for new deals in Midtown South increased just 4.7 percent to $68.86 per square foot in 2015. This represents a 77.2 percent increase in the submarket's average starting rents since it reached a post-recession low in 2010.

Overall average asking rents in Midtown South fell to $68.06 per square foot this quarter, a decrease of 2.5 percent from $69.80 per square foot in the third quarter of 2015. Year-over-year, the submarket's overall rates grew 12.0 percent from $60.78 per square foot in the fourth quarter of 2014. Class A average asking rents fell to $78.41 per square foot in the fourth quarter of 2015, a decrease of 1.3 percent from $79.44 per square foot the previous quarter. Year-over-year, Midtown South's Class A rates rose 10.2 percent from $71.15 per square foot at year-end 2014.

Downtown

Leasing activity Downtown has dropped 50 percent in 2015 compared with 2014. Lower Manhattan had outperformed the rest of the New York office market for most of the prior two years. Higher rent growth for Downtown product vs. office buildings in the rest of the market may have contributed to the slowdown. The discount between overall asking rents in Downtown and Midtown fell to approximately $15 per square foot in 2015, among the slimmest margins recorded in the past decade.

Lower Manhattan recorded seven large leases of 100,000 square feet or greater in 2015, down from 10 in 2014, 13 in 2013 and 15 in 2012. Three of the top four Downtown leases of the year were signed in the fourth quarter. The Teachers' Retirement System of the City of New York renewed and expanded to 191,138 square feet at 55 Water Street and The Associated Press relocated from Midtown to 172,442 square feet at 200 Liberty Street. GroupM expanded its early commitment to 3 World Trade Center by 171,495 square feet at year-end. In 2013, the media conglomerate originally committed to 516,000 square feet at the tower, which is on track to be delivered in early 2018.

Although the overall Downtown vacancy rate was essentially flat year-over-year, the submarket's overall vacancy rate has dropped considerably from the 12.5 percent posted in the first quarter of the year, when large block availabilities including 28 Liberty Street, 300 Vesey Street and 375 Pearl Street came to market.

Lower Manhattan's overall vacancy rate fell to 11.1 percent this quarter, a decrease of 3.5 percent (or 0.4 percentage points) from 11.5 percent in the third quarter of 2015. Year-over-year, the submarket's overall vacancy rate rose 3.7 percent (or 0.4 percentage points) from 10.7 percent in the fourth quarter of 2014. The Class A vacancy rate declined 3.2 percent (or 0.4 percentage points) to 12.0 percent in the fourth quarter of 2015 from 12.4 percent the previous quarter. Year-over-year, Downtown's Class A vacancy rate grew 3.4 percent (or 0.4 percentage points) from 11.6 percent at year-end 2014.

Overall average asking rents in Lower Manhattan rose to $57.60 per square foot this quarter, an increase of 1.9 percent from $56.53 per square foot in the third quarter of 2015. Year-over-year, the submarket's overall rates grew 5.8 percent from $54.43 per square foot in the fourth quarter of 2014. Class A average asking rents grew to $62.54 per square foot in the fourth quarter of 2015, an increase of 1.2 percent from $61.81 per square foot the previous quarter. Year-over-year, Downtown's Class A rates rose 6.7 percent from $58.60 per square foot at year-end 2014.