Midtown Manhattan, the haven of aging office towers filled with banks and law firms, received a bleak diagnosis from the city’s real estate experts.
According to office leasing experts speaking during the Real Estate Weekly Women’s Forum, the area is set to become the “cheap alternative” as tenants continue to migrate to more fashionable areas like Brooklyn and Midtown South.
“This is the first time you see Midtown advertising itself as the cheap alternative. The flight out of midtown is a result of tenant base and tenant mix,” said Lisa Kiell, the international director for the tenant representation group at JLL.
“Their choice is to be in an area with a cooler vibe, Midtown South or Brooklyn. There are lots of people not wanting to be in Midtown. Companies new to New York, or just starting out, are going to Midtown South, Downtown or Brooklyn.”
Laura Rapaport, the senior vice president of development and capital raising at L&L Holding Company, agreed with Kiell’s assessment, saying that the area lacks the trimmings for creating culture.
There is evidence that Midtown’s appeal is fading. According to Savills Studley’s latest Effective Rent Index, the value of concession packages reached a new record of $138.50 per s/f. Meanwhile, leasing activity in the area dropped to 10.3 million s/f in 2015, 2.3 million s/f less than the figure from a year before. On the opposite side, total rent (the sum of net rent, operating expenses, real estate taxes and electricity) inched up by just 0.5 percent to $84.34 per s/f. The company has predicted that midtown is in the early stages of transition from a landlord’s market to a tenant’s market.
However, Rapaport’s company has chosen to invest in the submarket with two large new projects at 425 Park Avenue and 390 Madison Avenue, two office towers that will bring new cutting-edge commercial offerings to a neighborhood currently defined by re-models.
Last September, Citadel signed a lease for a 200,000 s/f space at 425 Park Avenue in Midtown. Rent was $300 per s/f, a city record.
Rapaport said that both 425 Park and 390 Madison are poised to shift the conversation when it comes to what Midtown can offer.
Christl Engel, executive managing director at Colliers International also praised L&L’s invention and creativity in building new office stock in the neighborhood, saying, “It’s all about creating an environment that makes your people attracted to staying in context of that environment. I do see hope for Midtown, hope for any landlord who wants to re-invent their building.ˮ
Snezana Anderson, a senior vice president at CBRE, was also optimistic about the area’s appeal as a business district, saying that the area remains the site of large deals. “There are still some very large transactions in Midtown, while everybody is feeling obliged to look at other opportunities, newer buildings have incredible floor plates that attract young talent, but banks [and institutions tend to] choose to stay in high end districts,” she said.
The panelists predicted that, until the Midtown East re-zoning issue is resolved and obsolete inventory replaced, Midtown may continue to lose tenants to the west side.
“The trend is going to continue towards the west side; 20s to 40s west of Fifth will become a feeder industry to Hudson Yards. It’s amazing what you see now, looking at what that community is offering, not to mention you’re completely connected to the Highline,ˮ said Engel.
“There needs to be rezoning as soon as possible to make the conversion happen.ˮ
Panel moderator, Lindsay Ornstein, leader of the New York office of Transwestern, opined that the trend towards trendier office space is encouraging some developers to build above code, noting, “When you have 200 people on a floor and four bathrooms it doesn’t work. Build above code. Think about integrated bathrooms, just stalls. Densification is leading to fundamental changes in the way buildings have to be built.ˮ
Orenstein said every owner has the ability to maximize the value of their space through clever design and forethought, but she asked the panelists to consider what amenities are here to stay, and what may be passing fads.
Rapaport said owners have to consider, “What can we do to enhance an environment, how can we make this a place where people hire or retain top talent? Things like rooftops, it creates a space that was previously underutilized, people can go outside and enjoy light and air and have a coffee.
“People spend a lot of time in the office and employers want to offer their employees the best. The tech sector has a positive impact on how we look at space.ˮ
Kiell said it has become important to have an interesting food offering or coffee shop. “Retail has become an important element … people they want to have those amenities close by.ˮ
Tricked out kitchens and meeting rooms are also a means to “keep people in the offices as long as possible and increase productivity,ˮ added Engel.
The Colliers executive was also a proponent of the co-working trend, predicting, “We’re living in an on-demand society, co-worker spaces are here to stay and here to evolve. Many more concepts will be found, to the tune of WeWork and their rapid expansion.
“They’re more than just a co-work facility. They’re offering not just an office, they have figured out how to build a fraternity, a community, a place where you can have flexibility, share and connect further and build companies within the companies.ˮ
While some landlords will shy away from co-working spaces, Engel said, “As long as a landlord can provide separate entry, separate from the rest of the building, it will enhance ownership and will expand within that context.
“There will be five or six new [co-working] deals in Midtown and that will have an impact in recreating certain neighborhoods, bringing energy that wasn’t there before. I’m excited about the influx.ˮ
With several headline-grabbing jumbo deals signed at the massive Hudson yards development, Ornstein sought predictions on what’s next at the largest and most impactful development in Manhattan.
With rents ranging from $85 to $140 psf, Snezana Anderson said, “It isn’t prohibitively expensive for many firm. There are stretches of open space, amenities and parks, I think we’ll see operations like film studios and more creative industries moving their operations there.ˮ
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