Midtown Manhattan, once the pinnacle of U.S. office markets, is facing a jump in large, empty work spaces as new towers open and tenants spread out across the city, including outer boroughs that businesses once shunned.
By 2017, about 21 million square feet of Midtown's Class A offices, or about 14% of the market, will probably be available, Keith DeCoster, director of U.S. real estate analytics for brokerage Savills Studley Inc., estimated. That's just shy of the 22.6 million square feet of top-quality space that was available at the height of the last recession in early 2009, he said.
The projection, which assumes a continuing economic recovery, "is a very conservative estimate," DeCoster said in an interview. "It could certainly push higher" if there’s a decline in job growth or wealth creation.
Midtown, home to such pricey office meccas as Park Avenue, the Plaza District and Avenue of the Americas, has been hit with a succession of departures by major companies lured to new or renovated buildings downtown and the Hudson Yards-area developments on the far west side. The looming question is whether Midtown's core, where rents are still below the record levels set before the financial crisis, can stay competitive, especially if the economy slips.
Tenant Departures
In the fourth quarter, financial companies KKR & Co., Wells Fargo & Co. and Boston Consulting Group agreed to leave Midtown offices to go to Hudson Yards — victories for Related Cos., which is developing what it calls the largest-ever private U.S. real estate project atop the train depot west of Pennsylvania Station.
MetLife Inc. put about 420,000 square feet up for sublease at 1095 Avenue of the Americas, and the law firm Paul Hastings LLP made plans to leave about 410,000 square feet at the Park Avenue Tower near East 55th Street, bought last year by Blackstone Group, according to brokerage Newmark Grubb Knight Frank. Both tenants are relocating to the MetLife Building, at 200 Park Ave., Midtown's biggest office tower.
Among other landlords facing vacancies are Ivanhoe Cambridge Inc., a buyer last year of 1095 Avenue of the Americas; Sheldon Solow, who controls 9 West 57th St., KKR's current home; and Durst Organization, owner of 4 Times Square, which has no committed tenants beyond 2020, when law firm Skadden, Arps, Slate, Meagher & Flom LLP will depart.
Time Inc.'s move to lower Manhattan from its namesake Midtown building leaves Rockefeller Group with an entire tower to lease up. The landlord is spending $300 million to modernize the former Time & Life Building, now known by its 1271 Avenue of the Americas address, said Dwayne Doherty, a spokesman for the firm.
'Probably Peaked'
"Midtown's core, there's no doubt, has probably peaked for this cycle," DeCoster said. "It could be several more years until availability really starts to go back down again, when you consider all the opportunities that are going to come up in the next couple of years."
Class A office availability in Midtown rose to 11.8% in the fourth quarter from 10.6% in the previous three months, according to a draft report by Savills Studley. Rents for the best-quality space averaged $87.44 a square foot, down 3.5% from the third quarter. The average peaked in the first quarter of 2008 at $102.52.
Wells Fargo's and KKR's deals were the biggest in the fourth quarter, at 500,000 square feet and 343,000 square feet, respectively, according to the brokerage.
Manhattan-wide, leasing fell 13% last year from 2014, to about 36 million square feet, according to a report by Newmark Grubb Knight Frank.
Jonathan Mazur, research director at the brokerage, said the oncoming wave of development is an unprecedented challenge for the market. In addition to Hudson Yards, where 4.3 million square feet in two skyscrapers are almost fully pre-leased, SL Green Realty Corp.'s 1 Vanderbilt and L&L Holding Co.'s reconstruction of 425 Park Ave. and 390 Madison Ave. are in their early stages. More skyscrapers are slated for Hudson Yards as well.
Office availability in Midtown is almost four percentage points higher than in 2007, "and that delta will not likely narrow between now and 2020," Mazur said in an interview.
Transportation Hub
Midtown landlords are confident the virtues that made it the country's biggest and most expensive business district will prevail, said Andrew Gottesman, vice president of the Avenue of the Americas Association and principal of Edison Properties, a landlord whose holdings include the Hippodrome Building at 1120 Avenue of the Americas.
"Midtown will remain the transportation hub of Manhattan, and the center of things in Manhattan," he said. "Grand Central is going to be where Grand Central is. Penn Station is going to be where Penn Station is."
Callahan Capital Properties — Ivanhoe Cambridge's partner on 1095 Avenue of the Americas, now called 3 Bryant Park — has "a robust leasing pipeline of active transactions, and we are optimistic of continued activity and growth" in the area, said Michael McMahon, a spokesman for the firm.
Brooklyn, Queens
With many financial tenants scaling back, the New York market now has fewer corporate tenants demanding huge blocks of space. The pool of companies seeking 250,000 square feet or more is "quite shallow," Savills Studley said in its draft report.
Proliferating technology and media firms have helped drive rents in lower Manhattan and Midtown South, the area roughly from 30th to Canal streets, to record highs. The companies, mostly led and staffed by millennials, also have turned one-time industrial areas in Brooklyn and the Long Island City section of Queens into popular office markets. Midtown has struggled to capitalize on that demand.
"We're seeing tenants move everywhere," said Ken McCarthy, senior director for tri-state research at brokerage Cushman & Wakefield Inc., which will issue its own Manhattan market report on Tuesday. "You used to hear tenants say 'I'm a Midtown company and I'm going to stay a Midtown company.' Now you see more openness to other areas of the city, and the millennial population is definitely driving that."
Job Growth
The key to keeping the office market afloat is continued job growth, McCarthy said. New York City gained more than 105,000 jobs in the 12 months through November, state Department of Labor figures show.
While the opening of new towers is "going to leave some holes" in the market, "it's not all happening tomorrow," McCarthy said. "We're talking about over five years, and during that time there's going to be absorption — new jobs created, companies moving into the city."
Landlords of existing buildings "are going to have to upgrade their properties to compete," he said, "and the winners are going to be the ones who do that the best."
