Aug. 20 (Bloomberg) -- The luster is fading on some of midtown Manhattan’s shiniest skyscrapers.
Buildings in Midtown, from 30th Street to Central Park South at 59th Street, have more vacant blocks of contiguous office space than at the height of the recession in 2009, as landlords face increased competition from buildings downtown and at Hudson Yards on the far west side, according to a study by Savills Studley Inc., a New York-based real estate brokerage.
“The epicenter of this city has shifted several times before and is in the process of shifting again,” Michael Cohen, tri-state region president of brokerage Colliers International, said in an interview. Midtown is “the hole in the doughnut,” where landlords are vulnerable to extended vacancies and rents that probably won’t rise dramatically.
The area, traditionally the most prestigious and expensive U.S. office market, has turned into one where landlords must market space aggressively, pour money into renovations and seek early lease renewals to retain tenants. The technology and media companies that have driven New York’s leasing in recent years have clustered in midtown south, between Canal Street and 30th, or moved to lower Manhattan in search of cheaper rents.
At the end of June, 35 blocks of at least 150,000 square feet (14,000 square meters) of contiguous space each were on the market in Midtown, compared with 31 available in mid-2009, according to Savills Studley. Vacancies may rise next year as tenants continue to consolidate, Keith DeCoster, the study’s author, said in an e-mail.
“The plethora of big block opportunities in Class A buildings sets the stage for one of most dynamic and mobile leasing markets in years,” he wrote in the study.
Publisher Time Inc. moving from the Time & Life Building on 50th Street to Brookfield Place in lower Manhattan, while Conde Nast Publications is relocating from 4 Times Square to 1 World Trade Center. Both buildings will need new tenants.
Financial companies are also heralding change. JPMorgan Chase & Co., the biggest U.S. bank, is considering moving its headquarters at 270 Park Ave. to the World Trade Center or the far west side, though no decision is imminent, according to a person with knowledge of the matter. Citigroup Inc. is relocating its main offices from 399 Park Ave. to buildings it occupies on Greenwich Street in lower Manhattan.
New York tenants are opting for value over prestige, said Craig Lemle, a senior managing director at Savills Studley. About 54 percent of the Manhattan office space available as of June 30 was considered Class A, the highest quality.
Until late 2012, that share had never exceeded 50 percent in data going back to the beginning of 2000, when 21.9 percent of available space was Class A.
“Traditionally, the better spaces get rented first,” Lemle said in a phone interview. “But in these days of managing costs, we’re finding more and more tenants are looking for space that’s, quote, a better deal, than for space with better views or more prestige or higher in buildings.”
Rents for Class A offices in Midtown averaged $84.81 a square foot at the end of the second quarter, up 8 percent from a year earlier. Top-quality space downtown averaged $62.92, a 15 percent jump, according to Savills Studley.
“There’s enough supply in Midtown to keep a lid on rents for the foreseeable future,” said Cohen of Colliers.
Midtown has 270 million square feet of office space, and about 57 percent is considered Class A. In lower Manhattan, from the foot of the island to Canal Street, about 42 percent of the 95 million square feet of offices are top-quality.
Savills Studley defines availability as currently vacant space plus anything available for occupancy within the next 12 months. Two towers under construction at Related Cos.’ Hudson Yards, the first of which will be ready late next year, and the 2 million square feet at the Time & Life Building, slated to become available in 2018, aren’t included in the study.
Rockefeller Group, owner of the Time & Life Building on 50th Street and Avenue of the Americas, is among landlords who see vacancies as an opportunity to make over their buildings, a task more easily accomplished without tenants underfoot.
The entire property’s offices will become available when Time Inc. moves its headquarters to downtown’s Brookfield Place, said Dwayne Doherty, spokesman for Rockefeller Group. The landlord plans to spend millions of dollars to make it a multitenant building, which has “already attracted interest from tenants with major requirements,” he said in an e-mail.
A similar overhaul is already under way at nearby 75 Rockefeller Plaza, where new landlord RXR Realty Corp. is upgrading the entire 630,000 square feet. The $150 million project includes raising office ceilings from 7.5 feet (2.3 meters) to 9 feet, and relocating mechanical equipment from the top floor to create new high-priced space, said Scott Rechler, RXR’s chief executive officer.
Rechler last year acquired the leasehold on the 31-story tower, which overlooks the Rockefeller Center skating rink and the location of its famous Christmas tree. Main occupants Warner Music Group and NBC Universal have vacated, and the building will be ready for new tenants in late 2015, he said.
The next two years are the “sweet spot” for RXR to attract new tenants because most buildings in the Hudson Yards area won’t be completed yet, Rechler said in an interview.
“There are over 75 tenants with leases over 100,000 square feet whose leases expire in that ’15-to-’17 period,” he said. “That’s who we’re talking to.”
At 4 Times Square, principal tenant Conde Nast Publications Inc. will start moving to 1 World Trade Center in November, leaving more than 800,000 square feet behind. Landlord Durst Organization, which also operates and has a stake in the magazine publisher’s new headquarters, is responding with a $70 million to $80 million renovation of the building that will include new bathrooms, a climate-control and cogeneration system and elevators that can be summoned by destination.
Durst has listed Conde Nast’s space for occupancy in the first quarter. The landlord also is in talks to keep its other office tenant, the law firm Skadden Arps Slate Meagher & Flom LLP, whose rental agreement expires in 2020, said Thomas Bow, Durst’s leasing director.
Owners of older properties are competing for tenants amid Manhattan’s biggest surge of office construction since the late 1980s. Downtown, more than 2 million square feet are unrented at 1 and 4 World Trade Center, and another 2 million square feet are available at 3 World Trade Center, now being built.
Near the Hudson Yards train depot on Midtown’s far west side, about 20 million square feet of offices are proposed or under development.
Mary Ann Tighe, CEO for the New York area at brokerage CBRE Group Inc., said Midtown is caught between the west side and downtown construction booms and “the warehouse phenomenon,” which drew technology companies including Google Inc, Facebook Inc. and EBay Inc. to vintage buildings in midtown south. A surge in rents in that area, roughly from 30th down to Canal streets, has helped trigger a surge of leasing in lower Manhattan.
“Midtown is definitely playing catch-up,” she said.
Tighe said she sees a rebound in demand from mid-sized financial firms, citing recent expansions by Neuberger Berman Group LLC and Blackstone Group LP, which have capitalized on cutbacks by the larger banks.
Not all of Midtown is weighed down by large vacancies. The Plaza District, home to some of the country’s highest office rents, “remains the preferred location” for private-equity and hedge-fund firms, which can afford the costs, according to Savills Studley. Availability in the submarket, named for its proximity to the Plaza Hotel overlooking Central Park, is well below the 13.4 percent average for Class A space Manhattanwide, the firm said.
Most tenants shopping for space now aren’t set on a particular location and are more interested in the building itself, according to Rechler.
“Historically, they’d say ‘I want to be on Park Avenue,’ or ‘I want to be on Sixth Avenue,’” he said. “They’re now willing to look at the whole spectrum of submarkets at what buildings specifically meet their needs.”
To contact the reporter on this story: David M. Levitt in New York at firstname.lastname@example.org
To contact the editors responsible for this story: Kara Wetzel at email@example.com Christine Maurus