Demand for large blocks drives Midtown recovery

Real Estate Weekly, August 24, 1994

Demand for large blocks of Class A space in Midtown Manhattan is continuing, according to an analysis by CB Commercial Real Estate Group, Inc. For example, Oxford Health Plans, Inc. is leasing 94,000 square feet at 1133 Avenue of the Americas and S.G. Warburg & Co. is taking 160,000 square feet at 277 Park Avenue.

Activity in Class B and C buildings in Midtown is stable, but will not see substantial improvement in the near future, according to the report. And the best thing Downtown can hope for is to keep treading water because there is no rescue in sight for this beleguered market, according to the analysis.

"There is light at the end of the tunnel and for the first time it's not a train that will run us over," said Steven A. Swerdlow, executive vice president and managing officer of CB Commercial in New York City.

Midtown Class A: The Barometer for Recovery

In a tracking study completed by CB Commercial, a sample of 65 of the best Class A buildings in Midtown Manhattan shows asking rents up 10 percent from one year ago to $44.86 - 27 percent higher than the average Midtown North (the East-West area between 42nd Street and 59th Street) asking rent. The average vacancy in the study is only 11.5 percent, compared to 12.1 percent for Midtown North, an area with the highest rents in Manhattan.

Few people realize that approximately 45 percent of the office space in Midtown was built before World War II. And, unlike the rest of the country, where approximately 50 percent of the office space was built in the 1980s, 85 percent of the office space in Manhattan was built before 1979. If tenants are willing to compromise on location, building quality, fit out and lease term, there are many opportunities in these older Midtown buildings, where space can be leased for under $30 a square foot. However, if a company is looking for a well-located, Class A new building, you are generally limited to 15 percent of the existing market and rents will reach up into the $40s, according to the report.

Treading Water in Downtown

In the near term, Downtown can only hope that things don't get any worse, the CB Commercial analysis concludes. The vacancy rate has hovered between 20 and 23 percent for the last eleven consecutive quarters. Several large Downtown tenants either are already in or will be in the market over the next six months. This means large tenants like Sullivan & Cromwell, with over 300,000 square feet, Swiss Bank, whose Downtown total is in excess of 600,000 square feet, the Depository Trust Company, with 400,000 square feet, and Stroock, Stroock & Lavan, with 250,000 square feet, will have the option of renewing Downtown or moving elsewhere.

The only thing stopping some of these tenants from a move to Midtown may be the shortage of large blocks of Class A space. While several large blocks exist, demand is building, and some tenants looking beyond Downtown may end up considering the New Jersey waterfront or Brooklyn, particularly for back office requirements.