April 10 (Bloomberg) -- The surge of office demand from New York’s technology, media and fashion companies is rapidly depleting the supply of affordable space in the city, especially in lower Manhattan, according to brokerage Studley Inc.
Downtown had 4.3 million square feet (399,000 square meters) of available Class B offices at the end of last month, 45 percent less than in 2011, Studley said in a report posted on its website today. The market’s lower rents are being taken advantage of by a wide range of cost-conscious tenants, including engineers and architects, advertising, schools and health care, Studley executives said.
While lower Manhattan’s smaller and older office buildings are filling up, the area’s supply of the highest-quality, most-expensive space has been growing, with the opening of new skyscrapers at the World Trade Center site. As the downtown market gets tighter, tenants are going to have to reach deeper into their pockets for some of that real estate, said Heidi Learner, Studley’s chief economist.
“The early-bird tenants have largely taken the best stock” of Class B and C offices, she said in an interview. Latecomers “are going to be forced to go into a little higher-quality space and pay up for it, while realizing that what they’re paying is still significantly less than what they’d be paying in either Midtown or midtown south.”
Downtown has about 8.7 million square feet of unrented Class A space, including 4.4 million square feet added in the three years through March, according to Studley. That includes offices in the new 4 World Trade Center and the almost-completed 1 World Trade Center, the Western Hemisphere’s tallest building. The market has a total of 95 million square feet of offices.
Leases were signed for about 10 million square feet of downtown space in the year through March, the biggest four-quarter tally since 2000, the firm said. The surge was driven largely by creative companies, many of them looking for better rents than they can get in the converted factories of midtown south, where demand has pushed costs out of reach for some smaller firms.
A report published in December by New York City’s Economic Development Corp. said the need for Class B and C buildings, critical to companies that have grown out of their startup phase, will exceed the supply starting in 2018. That’s due to the expected expansion of such companies and conversions of old buildings to residences, typically the most lucrative property type for developers.
“If we really want to help these businesses grow, we need to really use our resources and some of the tools in our toolbox, whether it’s zoning or tax incentives to encourage the preservation of existing B-space or funkier spaces that these companies want to be in,” Alicia Glen, New York’s deputy mayor for housing and economic development, told reporters last week after a speech to the Association for a Better New York.
She advocates encouraging commercial and manufacturing zones outside of the city’s central business districts.
“We actively want to see mixed-use communities,” Glen said.
While the administration of Mayor Bill de Blasio has made creation of more affordable housing one of its top priorities, it also plans to “take a fresh look” at the need for less-costly offices in all five boroughs, Kyle Kimball, president of the Economic Development Corp., said in an e-mail last month.
State economic incentives, implemented after the Sept. 11, 2001, attacks to encourage companies to move to lower Manhattan, were renewed in the new state budget, Learner said. That should soften the blow of higher rents, she said.
The availability rate of Class B and C offices downtown fell to 8.7 percent at the end of the first quarter, compared with the 15.2 percent rate of early 2011, according to a draft of a separate report by Studley. Space priced at less than $40 a square foot was depleted by the middle of last year, prompting tenants to look at buildings formerly dominated by financial companies along Water Street on the east side.
Among companies taking advantage of downtown’s lower costs was MacMillan Publishers Ltd.’s science and education unit, which in the quarter took about 176,000 square feet at 1 New York Plaza, a 50-story tower near the foot of Manhattan owned by Brookfield Office Properties Inc. Similar-quality space downtown costs about $20 less per square foot than in Midtown, said Steve Coutts, senior vice president for research at Studley.
Asking rents in lower Manhattan averaged $49.12 a square foot at the end of the quarter, a 22 percent jump from a year earlier, according to data published yesterday by brokerage Cushman & Wakefield Inc. Office rents in midtown south averaged $60.02 a square foot, a 15 percent increase. In Midtown, the largest and most expensive U.S. office market, the average was $70.06 a square foot, up 6 percent.
Leasing throughout Manhattan is accelerating even as banks and other large financial companies scale back, said Donald Noland, managing director of research at Cushman. The roughly 9.4 million square feet leased in the first quarter was the highest three-month total in 10 years, he said.
While tenants still have choices, the market is more likely to be tighter than looser over the next six months, Noland said.
One question is whether the trend will help fill vacancies at the World Trade Center, where 2.4 million square feet remain available in towers 1 and 4. Two 2 million square feet more may be added if 3 World Trade Center is built. The planned tower, where advertising firm GroupM Inc. has agreed to take 500,000 square feet, is the subject of financing negotiations between developer Larry Silverstein and the Port Authority of New York and New Jersey, which owns the 16-acre (6.5-hectare) site.
One World Trade Center is seeing “considerable interest” from media, technology, fashion and financial services companies, according to Eric Engelhardt, who oversees leasing for the Durst Organization, the Port Authority’s development partner on the tower. Conde Nast Publications Inc. will be the anchor tenant, with 1.2 million square feet of space.
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