July 8 (Bloomberg) -- Midtown Manhattan rents for the highest-quality offices rose 22 percent since bottoming out nine months ago as financial firms filled space in the largest and most expensive U.S. market, brokerage Studley Inc. said.
In the Plaza District, the area surrounding the Plaza Hotel near Central Park, lease rates for class A offices spiked 43 percent since Sept. 30 to almost $84 a square foot at the end of June, the New York-based firm said in a draft report. That’s more than four times the district’s growth rate in the first nine months of 2004, when the Manhattan office market began recovering from the previous recession.
“Hedge funds and the like, those are really driving the top end of the market,” said Steve Coutts, Studley’s senior vice president for research. “If you’re going to recruit top talent, the cost of the space is less of an issue than is attracting that talent and maintaining that talent.”
Midtown’s status as a “have-to-be-in” market for international financial firms is driving up rents and reducing vacancies, especially in the Plaza, Rockefeller Center and Grand Central Terminal neighborhoods, which have the city’s most costly offices, according to Coutts. The gains reflect job growth that’s helped Manhattan recover its position among the best-performing U.S. economies, along with Washington and the Dallas/Fort Worth area of Texas, he said.
New York City’s unemployment rate was at a 25-month low of 8.6 percent in May, the state Department of Labor said on June 16. The city’s financial industry showed a net gain of 10,400 jobs in the 12 months through May.
The availability rate for all Manhattan offices fell to 11.3 percent at the end of June, from 12.2 percent in the first quarter, the largest decline in more than three years, according to Studley. Rents sought by landlords rose for the third straight quarter to $50.69 a square foot, up 2.4 percent from the previous three months and 7.2 percent from a year earlier.
Lease rates for class A offices in Midtown were $72.64 a square foot in the second quarter, a 9.5 percent jump from the end of March and 15 percent more than June 2010.
A separate report from Jones Lang LaSalle Inc. showed the top Midtown buildings -- including the General Motors Building, 712 Fifth Ave. and Carnegie Hall Tower -- are outperforming the general class A market.
A deal was signed this year at the GM Building for $175 a square foot, the Chicago-based brokerage said on July 5. A space at 712 Fifth Ave. went for $137.29 a square foot, more than 60 percent above the high point of the previous two years yet below 2008’s rate of $173.13 a square foot.
Studley data show top-tier Plaza District rents remain about 35 percent below the peak of $129.29 a square foot reached in March 2008. Midtown class A rents are 27 percent below the peak of $102.52 a square foot in the same period.
Cerberus Capital Management LP, a private-equity firm whose chairman is former Treasury Secretary John Snow, signed the second quarter’s largest new lease in the Plaza District, taking 110,000 square feet (10,200 square meters) at 875 Third Ave., a 29-story glass tower at East 52nd Street, according to Studley’s report.
Conde Nast Publications Inc.’s agreement to leave its Times Square headquarters in Midtown and rent 1 million square feet at 1 World Trade Center, under construction in lower Manhattan, was the borough’s biggest deal for the quarter.
The gains for high-quality offices may be masking sluggishness in demand for older, less well-appointed properties, Coutts said.
About 27 percent of Manhattan’s office buildings are more than 10 percent empty, according to Studley, and about one-10th of properties are more than 20 percent vacant. About 8.1 million square feet of offices have been available for more than a year.
The wave that has carried the market since it bottomed last year may be cresting, according to Coutts. Landlords and tenants last year began negotiating many early renewals on leases scheduled to expire in 2012 and 2013, “essentially borrowing” from future deal volume, he said.
Colliers International, in its own draft report, said dealmaking slowed in the latter half of the second quarter. While this may be a “natural ebb and flow,” it might also be a reaction to the stock market decline in May and June, said Peter Kozel, chief economist at Colliers’ New York regional office.
“All the brokers were reporting that there just seemed to be less activity,” he said. “People were delaying doing deals.”
The Standard & Poor’s 500 Index dropped 7.8 percent from April 29 to mid-June. Through yesterday, it had recovered most of that loss. The index slipped 1.2 percent as of 11 a.m. in New York after reports showed U.S. companies added the fewest workers in nine months in June and the unemployment rate rose to 9.2 percent.
Other clouds over the market include reports that Wall Street firms are planning to cut employees in response to lower revenue and potential regulatory restrictions, according to Kozel. About 25 percent to 30 percent of tenants in Midtown are financial companies, he said.
“Government policy is to make the financial sector less risky, to make it smaller, to shrink it,” Kozel said. “So they’re growing more slowly, not moving into new businesses. It’s not that things are going to dry up and blow away. What I think we’re going to see is more measured growth, and more tied into intrinsic economic activity.”
--Editors: Christine Maurus, Larry Edelman
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