NYC Landlords: Let's Make a Deal

DeCoster: “We are witnessing the early, tentative stages of transition from a landlord’s market to a tenant’s market.”

NEW YORK CITY—Faced with weakening demand and increased competition for Class A space, some New York City commercial office landlords are now offering generous concessions to fill vacant space in their properties. Particularly in Midtown, the market is slowly transitioning to a tenant’s market. According to the latest Savills Studley Effective Rent Index report, rent growth in Manhattan’s office market has stalled. The SERI shows that total rent posted very weak increases in New York City’s core Class A submarkets last year, increasing by 1.7% to $52.97-per-square-foot Downtown and rising by just 0.5% to $84.34-per-square-foot in Midtown. Savills Studley defines total rent as the sum of net rent, operating expenses, real estate taxes and electricity. Landlords kept concessions at near record levels, Savills Studley notes. The value of concession packages rose slightly to $102-per-square-foot Downtown, nearly even with its peak set in 2011 ($104-per-square-foot). In Midtown concessions increased 0.4% to a new record value of $138.50-per-square-foot. Tenant improvement allowances in Midtown routinely average just over $70.00-per-square-foot with free rent periods of approximately 10 months. “We are witnessing the early and tentative stages of transition from a landlord’s market to a tenant’s market, particularly in Midtown,” says Keith DeCoster , director, US analytics at Savills Studley. “Rents are always sticky and what is true of one building doesn’t necessarily hold true for the next one—but with little indication that demand is going to intensify in the short-term and availability rising—conditions are likely to tilt a bit more in tenants’ favor in the coming quarters.” In January, Savills Studley released its fourth quarter report on the New York City office sector. At that time DeCoster told Globest.com , “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.” Office rental rate appreciation has slowed to a crawl as availability is pushing back towards the historic highs attained in 2013, the first quarter 2016 report states. With growing options Downtown, in Midtown’s core and on the Far West Side, the report notes that 25 million square feet of Class A space was available at the end of 2015, including 18 million square feet in Midtown alone. Despite a flurry of leases at Hudson Yards, Class A leasing activity in Midtown totaled 10.3 million square feet during 2015, down from 12.6 million square feet in 2014. Class A available space in Midtown increased by more than 1 million square feet year-on-year. Steve Coutts , Savills Studley’s SVP of national research services, expects Class A office availability to rise in 2016 with even sharper upward growth in vacancy rates there in 2017 and 2018. Class A leasing activity Downtown fell to 2.4 million square feet during 2015, a drop from 4.5 million square feet in 2014. Coutts says demand for full-floor premium space in the Financial District was “quite strong,” but activity in the World Trade Center dropped off as Hudson Yards and the Far West Side captured most of the larger leases, such as Wells Fargo’s and KKR’s major lease transactions at 30 Hudson Yards and Boston Consulting Group’s 193,295-square-foot deal at 10 Hudson Yards. “News Corp’s decision to remain in Midtown slowed what seemed to be an inexorable flow of media, publishing and entertainment tenants to Lower Manhattan,” Coutts says. “It also left 2 World Trade Center without a tenant at a time when the number of choices in Midtown is soaring and more tenants are considering options in Jersey City, Brooklyn and Queens. It will be interesting to see if landlords can achieve the rent levels they are currently seeking during 2016.”