Manhattan Tenants Pay Top Office Rents for Midtown South
Most landlords offering prestige Manhattan office space hate to be pinned down on their asking rents. Not Ed Minskoff.
“Between $88 and $115 a foot,” he said without hesitation of the prices he’s seeking at 51 Astor Place, the Fumihiko Maki- designed office project he’s building in the East Village. Those rates approach the highest rents for top-quality space in midtown Manhattan, the most expensive U.S. office market, as a booming technology market fuels demand for trendier areas.
“We’re having a huge amount of interest” from “lots of very, very exciting companies,” Minskoff said.
Office demand in New York is shifting from the glossy skyscrapers of Midtown preferred by banks to the quirkier mix of neighborhoods to its south that’s home to Chelsea warehouses, Soho galleries and the punky shops on St. Mark’s Place where Joey Ramone and Madonna refined their fashion sense. Technology, media and information firms that gravitate to the area took more Manhattan office space than financial companies this year for the first time, brokerage Cushman & Wakefield Inc. said.
About 44 percent of the 959,000 square feet (89,000 square meters) they leased through May 15 was in Midtown South, as the market roughly between 30th and Canal streets is known.
Clamoring for Space
Asking rents for Midtown South’s most desired offices averaged $66.74 a square foot on April 30, up 16 percent from the end of 2011 and just $5.22 short of the average for top- quality space in Midtown, where so-called Class A rents rose only 1 percent, according to Cushman. Rates are surging in part because companies are clamoring for offices in an area that has less than a tenth of the Class A space found in Midtown.
“There’s always been a delta between the economics of Midtown and Midtown South,” said David Falk, New York tri-state region president of commercial brokerage Newmark Knight Frank. “What’s happened is very quickly, before our eyes, Midtown South rents are rising higher than for many buildings in Midtown. Buildings where maybe you’d pay $50 a foot are now getting low $60s.”
The rent gap is closing as New York’s financial-services industry “is in a total shakeup,” said Ruth Colp-Haber, founding partner of Wharton Property Advisors Inc., a brokerage that represents Manhattan office tenants.
“They’re nervous about the elections in Europe, the elections here, about financial regulations, it’s very hard to raise money for any of the hedge funds,” she said. “So that demand is a lot more tentative. Where the growth is, is with the tech firms.”
New York is the fastest-growing U.S. technology hub, according to a study released this month by the Center for an Urban Future. While information technology employment in the city grew by 29 percent since 2007, securities industries jobs fell 5.9 percent, the New York-based public-policy group said.
EBay Inc. (EBAY), the San Jose, California-based operator of the world’s largest online marketplace, agreed this month to rent about 35,000 square feet at 625 Avenue of the Americas, a 19th century building west of Union Square that once housed the B. Altman & Co. department store. Annual rent per square foot will be in the “low $50s” over 10 years, said Sacha Zarba, the company’s broker at CBRE Group Inc. The lower-than-average rate reflects EBay’s strong credit rating, he said.
Buildings With ‘Character’
The Midtown South market ranges from historically affluent Gramercy Park to the once-foreboding warehouse and factory areas along the Hudson. The transformation of the High Line from an abandoned rail trestle into an elevated park helped make the Meatpacking District and West Chelsea two of the city’s most desirable neighborhoods for companies that are outside of Manhattan’s traditional financial base.
“They don’t want Midtown glass-curtain-wall buildings,” Mary Ann Tighe, New York regional chief executive officer at CBRE, said in an interview. “They want fully renovated former industrial buildings, or buildings that have character.”
In the Flatiron district, where people queue up daily for hamburgers at the Shake Shack in Madison Square Park, landlords CIM Group and Sapir Organization are asking as much as $80 a square foot for 296,000 square feet in the art-deco tower at 11 Madison Ave., according to two people with knowledge of the landlords’ marketing effort. They asked not to be named because the rates are private.
Across the park, developer Robert Lapidus said he’s close to a deal for about $90 a square foot for the final floor available at 200 Fifth Ave., a 14-story property at the corner of East 23rd Street, where the gourmet food market Eataly draws crowds of shoppers. He declined to name the tenant.
Pushing the Envelope
L&L Holding Co., Lapidus’s partnership with David Levinson, acquired and renovated the 852,000-square-foot former toy showroom building in 2007. Their first tenant, the advertising firm Grey Group, agreed to pay about $75 a square foot that year, Lapidus said in an interview.
Landlords can afford to push the envelope on rents because of a limited supply of space in the area, he said.
“I have a friend who’s in private equity, and he does mostly technology stuff,” Lapidus said. “He’s in Midtown now. He’s signing a deal in the Meatpacking District, $80 a foot, in not a great building. It’s an OK building, but there’s not a lot of options out there.”
Midtown South had the lowest vacancy rate of any U.S. business district in the first quarter, at 5.9 percent, according to Cushman. The market has only 27 buildings of Class A offices totaling 14.4 million square feet, compared with 320 buildings and 181 million square feet for Midtown, the New York- based brokerage said.
The demand for space is behind a bid by Atlanta-based Jamestown Properties to build 240,000 square feet of offices atop its Chelsea Market, a former cookie factory that houses media and broadcasting companies, as well as a popular food bazaar.
Property prices reflect the area’s rapid rise. Epic UK Ltd., a New York- and London-based real estate firm led by brothers Michael and Steven Elghanayan, bought the 155,000- square-foot office building at 148 Lafayette St. in Soho this month for about $132 million, or $850 a square foot. That was higher than the per-square-foot price paid in January for 530 Fifth Ave., a 26-story tower near Grand Central Terminal in Midtown, according to research firm Real Capital Analytics Inc.
The Soho building’s seller, Property Group Partners, had purchased the 1913 former factory in 2007 for about $390 a square foot, then refurbished it, adding new elevators, hardwood floors and a glass penthouse. Fashion designer Dolce & Gabbana became the lead tenant.
Rent increases in Soho are unsettling to Eric Ashman, chief financial officer of Thrillist Media Group, an Internet company that was born in the neighborhood in 2005. The owner of websites including thrillist.com, which targets young men with recommendations for stores, bars and restaurants, is seeking to expand beyond its offices at 568 Broadway.
Seeing Soho landlords upgrade their buildings is an ominous sign, he said.
“They’re telling people they need new lobbies, and then they’re asking $60, $65 a square foot,” Ashman said in an interview. “Those aren’t prices we’re going to pay.”
Fellow tenants at Thrillist’s current building include Foursquare Labs Inc., maker of the smartphone application that lets users tell their friends where they’re eating, drinking or shopping.
The market will probably get even tighter as startups outgrow their “incubator” locations, companies into Brooklyn and other less expensive markets, according to the Center for an Urban Future report. A recovery by financial firms may squeeze technology tenants even tighter.
“The phenomenal growth of New York’s tech sector has occurred at a time when other key industries in New York were not growing, and not absorbing a lot of real estate,” the center said. “When law firms, media companies, architecture firms, investment banks and other major sectors begin to grow again, tech startups could find it far more challenging to find space at the price points they have become accustomed to.”
Midtown South has had booms before, only to be followed by busts, starting with the late 1990s when it became known as Silicon Alley after an influx of Internet startups. Acres of offices were abandoned in 2002 and 2003 when capital dried up for the so-called dot-com companies. Later, the financial crisis sent the vacancy rate soaring to 10 percent at the end of 2009.
Then in December 2010, Google Inc. (GOOG) bought 111 Eighth Ave. for $1.8 billion, one of the highest prices ever paid for a single U.S. office building. The Mountain View, California-based owner of the world’s most popular search engine had leased about 550,000 square feet in the former freight terminal, which has elevators capable of lifting trucks.
Google is taking over space in the 3 million-square-foot building as leases expire, forcing some tenants to look elsewhere. Spotify Ltd., the London-based music streaming service, is among companies shopping for space, according to Greg Taubin, executive managing director at Studley Inc., a New York-based brokerage.
Many of the tenants from Google’s building are considering lower Manhattan, where vacancies are higher, as an alternative to staying in Chelsea, according to Tighe of CBRE.
Google today said it would donate 22,000 square feet to Cornell University and Technion-Israel Institute of Technology to use while they build a campus on Roosevelt Island. The school is a city initiative to attract even more technology jobs and compete with Silicon Valley.
While there’s always a chance of another bust in the Midtown South market, it shouldn’t be as massive as the previous ones, Taubin said.
“Many of the young tech companies are taking a more conservative approach to their real estate, as opposed to years past where it was spend, spend, spend,” he said in an e-mail.
The companies in the market now are mostly profitable, which wasn’t the case back in 2000, according to Falk of Newmark Knight Frank.
Minskoff, the 51 Astor Place landlord, said he expects a company will pay for the opportunity to plant its flag in the East Village the way Google asserted its presence in Chelsea.
“The Google building is a good building, but it’s a big factory building,” he said. “It doesn’t knock your socks off. Fifty-one Astor is like an island. It’s very, very visible.”
Maki, a Pritzker Prize-winning architect, designed the 400,000-square-foot project as three glassy geometric forms. The plan for the 12-story tower, slated to be completed next year, allows for roof gardens on the fifth and top floors. Its $300 million price tag is funded through a $165 million construction loan from a syndicate of firms led by Bank of America Corp. Cooper Union, the neighboring engineering school, owns the building site.
At 11 Madison Ave., which serves as the U.S. headquarters of Credit Suisse Group AG, the 30-story stone tower was built in phases starting in 1928 by Metropolitan Life Insurance Co., now known as MetLife Inc. CIM and Sapir are offering four floors in the middle of the property that were vacated by Weight Watchers International Inc. (WTW), among other tenants.
Bill Mendel, a CIM spokesman, said company policy is not to discuss pending or potential leases. Rotem Rosen, a Sapir spokesman, and Philip Russo, a spokesman for CBRE, which is representing the landlords, declined to comment on the offering.
“The market will be watching 11 Madison and 51 Astor,” Falk said. “We’re all anxious to see what someone will pay. I believe they will find somebody who will rather be there than in Midtown.”
To contact the reporter on this story: David M. Levitt in New York at email@example.com
To contact the editor responsible for this story: Kara Wetzel at firstname.lastname@example.org