During the second quarter of this year, asking rents in Midtown South (which we define as the area from 39th to Canal streets) increased over 20% from the previous year, reaching an historical high of almost $60.00/rentable square foot (“rsf”). This makes Midtown South one of the most expensive office markets in the world. Here are some other significant data points:
Midtown South’s vacancy rate (below 7.5%) also makes it the tightest major market in the nation;
The percentage difference between Midtown South and Midtown (Class A&B) rents is at an historical low of 14%, way down from the historical high (75%) reached just five years ago;
Currently, rents in Midtown South average over $10/rsf higher than Lower Manhattan/Downtown, a $15/rsf improvement from the early-2000’s.
What factors are driving these trends?
The technology and creative “FAM” (fashion, advertising, media) industries are the are some of the fastest growing sectors in the country. Most of these tech and creative firms want to be located in Midtown South, as it offers many amenities unique to the region including: parks (Union, Washington and Madison Squares), access to transportation, a 24 hour community, unique restaurants/stores and the prevalence of a synergistic tenant population. Technology tenants enjoy strolling midday from Madison Square to Union Square along the Broadway corridor and bumping into colleagues, competitors, investors and service providers. Additionally, employee recruitment and retention is boosted by a location in this desirable submarket.
But the submarket’s attributes alone are not the only positive factors. Many of the qualities of the buildings and their owners offer unique attributes to this tenant population. Exposed ceilings, concrete or wood flooring, tenant controlled HVAC (heating/ventilation/air conditioning), electricity directly from ConEdison, operable windows, smaller floorplates, smaller spaces, full floor identity, building setbacks (offering outdoor space), bike and pet accessibility and flexible lease terms all offer amenities unique to this submarket.
Which submarkets are hottest?
Two submarkets in particular stand out within Midtown South: Soho/Noho/Village and Hudson Yards/Penn Plaza:
In the last year and a half, Hudson Yards/Penn Plaza has leased close to 2.5 million square feet in ten big block (75,000+ square feet) commitments;
At a less than 5% availability rate, the tightest submarket in Midtown South is the Noho/Soho/Village submarket. A combination of strong demand and the relative small size of this submarket tends to keep its vacancy/availability rates low. Accordingly, rents in these areas are rising dramatically, ranging anywhere in the $50-80/sf range. Most recently, high-profile tenants such as Facebook and IDEO Design have relocated to this neighborhood. The arrival of Minskoff’s 51 Astor Place later this year will relieve this bottleneck by providing over 400,000 square feet of new office space to this submarket.
Ironically, one area that may benefit from Midtown South’s tightness is neighboring submarket, Grand Central, from whence Facebook relocated earlier this year. This Midtown submarket currently has the highest availability at a 15% vacancy rate. While close to 90% of Grand Central’s properties were constructed prior to 1975 and have structural concerns for many of today’s tenants, the East Midtown Rezoning plan is designed to target these specific issues by providing zoning and incentives for new construction.
In commercial real estate, landlord vacancy creates tenant opportunities, so we expect to see many technology startups, priced out of Midtown South by rising rents, migrate northward into the Grand Central submarket formerly occupied by their mammoth poster child, Facebook.