NEW YORK CITY—While Midtown Manhattan is seen as one of the premier office locations in the world, brokerage firm Savills Studley reports the district is beginning to lose a bit of its luster.

In its fourth quarter report on the New York City office sector, author Keith DeCoster, director of US real estate analytics for the firm, states, "Midtown real estate remains one of the most prized assets in the world, but 2015 could be seen as a tipping point for Midtown's office leasing market. Midtown is at risk of being knocked off its pedestal as a 'must have' location for office tenants."

He cites the impressive pre-leasing volume at Hudson Yards where 1 million square feet in transactions were reported in the fourth quarter, as well the dispersing of tenant demand throughout the region, including the outer boroughs and New Jersey, as reasons why Midtown's fortunes may be changing. Wells Fargo's 500,000-square-foot lease and KKR's 343,000-square-foot deal at 30 Hudson Yards were the top two transactions in the fourth quarter. Boston Consulting Group's 193,295-square-foot lease at 10 Hudson Yards came in at number four, bested only by Morgan Stanley's 260,829-square-foot deal at 1633 Broadway.

Overall New York City office leasing increased to 7.1 million square feet overall during the fourth quarter of 2015, up from the 6.6 million square feet registered in the third quarter. Overall Class A availability rose slightly to 12.3%. Midtown's Class A availability rate rose 1.2 percentage points to 11.8%. Both Downtown and Midtown South enjoyed lower vacancy rates in the fourth quarter at 15.9% and a miniscule 1.8% respectively.

"2015 was a year of amazing change and tenant mobility," says Bill Montana, senior managing director of Savills Studley. "The flow of firms to Hudson Yards accelerated, intensifying the hollowing out of office buildings in Midtown's core."

DeCoster notes in his report, "Demand is dispersing across Manhattan and the metro region as tenants tap into options all over the island, and a few move to Northern New Jersey or the outer boroughs. As the center of gravity in the office sector is pulled in multiple directions, a long list of buildings in Midtown's core must rethink their leasing strategy and reposition accordingly."

Other key takeaways from the report include:

• The emergence of WeWork as the front-runner in the highly competitive shared workspace sector. The firm leased approximately 700,000 square feet of space in Manhattan in 2015 and has nearly 25 locations.

• Class A tenants are being selective and clearly prefer being in the area of Hudson Yards or Brookfield Place. Landlords leasing space in projects surrounding those districts are hopeful that they will eventually benefit. However, the report notes that thus far pre-leasing in the "edge properties" surrounding these developments has been tentative. DeCoster also characterizes the pool of prospective tenants requiring 250,000 square feet or more as "shallow."

• Class B and C office tenants are being displaced due to higher rents and smaller tenants may have to find sublet space for anything less than $40-a-square-foot, but will have to make allowances on quality.

• Another option for B and C space users is relocating to Brooklyn, Queens and New Jersey. Landlord incentives along with tax credits can push effective rents below $20-a-square-foot for Class A space in Jersey City and Hoboken, NJ. In addition, Brooklyn and Long Island City boast some of the largest and innovative adaptive reuse projects such as the former Jehovah's Witness Center, the Navy Yards and Industry City, which could be suitable for 3-D printing, video production and social media concerns.

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John Jordan

John Jordan is a veteran journalist with 36 years of print and digital media experience.

Leasing
New York