Sales and leasing activity booms in the city's existing inventory, but no new spec projects are on the horizon.
If there is any downside to the New York metropolitan area's commercial real estate and general economic boom, it is not yet in sight. Office building owners are seeing interest from prospective buyers as they seek to profit from selling some of Manhattan's most well-known properties. Landlords of both office and residential property all over the city can demand record-breaking rent levels from tenants. Hotels are nearly always filled, and more rooms are on the way. Retailers feel they have to be in New York and are desperately seeking the right showcases.
Yet, in spite of all of the tenants who are hungry for space, the high rents, the need for expansion, increased tourism and healthy consumer spending, there is virtually no speculative new construction in New York and no real signs of a downturn in the major commercial property sectors.
The overbuilding that often ensues from real estate's boom cycles is nowhere to be found in Manhattan. "We could use a couple of speculative office buildings, but you cannot find sites," says Kevin Haggerty, executive managing director with New York-based Insignia Capital Advisors. "As long as the capital markets stay disciplined, I don't think you are going to see overbuilding - not in New York. We are a tired, boring industry. There are no real wildcatters anymore," says Haggerty.
Instead of speculators, Manhattan is filled with a variety of tenants desperate to find space.
Office space leases at record rate New York's office leasing market "continued its extraordinary boom in the first half of the year by continuing to compensate for a scarcity of available space with record-high rents. It is showing no signs of letting up," says Joseph R. Harbert, chief operating officer for Insignia ESG's New York region.
Harbert says that approximately 1 million sq. ft. has been leased in Manhattan office buildings in the first seven months of this year. Space is at such a premium in Midtown (which boasts a 3.5% overall vacancy rate) that some space is hitting the market without an asking price," says Harbert. Vacancies for top-tier, Class-A office space are at less than 2%, "which is not even a working inventory," says Haggerty.
Supply and demand are way below the 8% to 9% availability equilibrium that allows for balanced and stable pricing, says Harbert. "We have not seen these numbers in over 20 years," he says. Midtown's high-end Plaza District around Fifth Avenue and 57th Street is seeing asking rents ranging from $80 to $100 per sq. ft., representing a jump of approximately $25 per sq. ft. in just one year, says Harbert. Net absorption in Midtown the first half of this year reached 5.6 million sq. ft. - 10 times more than the same period last year, according to Insignia ESG.
All three major office submarkets - Midtown, Midtown South and Downtown - are experiencing unprecedented demand, "resulting in strain on a market already pushed to its limit," says Harbert. A number of key industries are fueling the market, namely Internet, new media and telecom companies, as well as New York stalwarts such as financial services firms and advertising agencies. "The substantial leasing activity goes across a broad spectrum," says Harbert.
In Midtown South, "the unforeseen influx of high-tech companies into the area pushed leasing and absorption levels sharply higher and obliterated Midtown South's reputation as the city's low-priced alternative to Midtown's hefty rents," says Harbert. Asking rents have climbed to more than $42 per sq. ft., unexpectedly higher than Downtown's average of just more than $40 per sq. ft. The revitalized Union Square area has no space available, says Harbert.
The extraordinarily tight market is expected to persist, forcing tenants to take a more strategic approach to occupancy plans and possibly lock in space slated to become available in 2002 and beyond, says Harbert. "Some may even split their operations in order to secure the space they require to accommodate their operational needs," he notes.
The lack of new construction is preventing many tenants either from finding the space they need or from upgrading to more versatile space, observes Harbert. "While the redevelopment of older buildings is a step in the right direction and is certainly helping to revitalize areas of New York that were once written off as undesirable, most of these properties lack the sheer size needed to compensate for the continuing strong demand," says Harbert.
Despite the massiveness of Time Warner Center - the proposed new mixed-use complex at the former Coliseum site on Broadway at Columbus Circle - the project will no doubt have little impact on easing New York's office space shortage if the economy continues its buoyancy for the next few years. Scheduled for completion in late 2003, the $1.7 billion project is expected to include 193,000 sq. ft. of leasable office space.
A team consisting of The Related Cos., Apollo Real Estate Advisors and The Palladium Co. is developing the 2.8 million sq. ft. development, which is to consist of two 750-foot glass towers. AOL Time Warner will be the lead office tenant, using 864,000 sq. ft. for office and studio facilities.
The complex will house a seven-story retail venue of 364,000 sq. ft., 203 luxury condominiums and a five-star hotel.
Investors jump on opportunities After a dearth of transactions following the capital markets crunch of October 1998, the Manhattan investment market for office property has rebounded, with owners wanting to take advantage of today's favorable conditions.
Potential sellers see the current market as an opportunity for profit taking. On the buy side, big REITs, pension funds and German investors, among others, are attracted to core and core-plus assets as the central business district is in favor again, says Haggerty.
"The guys who bought two, five or seven years ago are taking profit. It's the next wave of the cycle and nothing unusual," says Haggerty.
In recent months, a number of Manhattan's prize properties are making news by coming on the market:
l Teachers Insurance and Annuity Association, owner of the Seagram Building at 375 Park Ave., confirmed in August that the architecturally significant, 38-story landmark is for sale. Brokers were reported as saying the building could sell for as much as $400 million, or about $600 per sq. ft.
l Also in August, Viacom Inc. announced that Black Rock, the 870,000 sq. ft. office building that houses CBS' headquarters at 51 West 52nd St., is for sale. The 38-story building, built in 1965, could sell for as much as $350 million, according to industry experts.
l Rockefeller Center, the Chrysler Building and the master lease to the World Trade Center all are on the market as well. "I'm hearing there is activity on all of them," says Haggerty.
Retailers vie for Manhattan space Office tenants aren't the only ones having trouble finding the right space. More national and international retailers feel they need a Manhattan presence and are scrambling to nail down an appropriate location.
Besides newcomers, the retail space market also is seeing expansion from existing stores. "Anything with a name - American or European - is taking a store to establish or reinforce their presence," says Faith Hope Consolo, vice chairman of New York-based Garrick-Aug Worldwide. Despite a minor glitch this past summer, retail sales remain strong and confidence is high. "New York City is the No. 1 retail destination in the world. It used to be Hong Kong," she says.
Consolo says that home furnishing and luxury brand retailers are leading the pack of those shopping for New York City retail space, as well as big-box retailers who have overcome their fear of Manhattan and aren't settling only for the suburbs anymore. "They're jumping in with both feet,"says Consolo. For example, The Home Depot is creating a new store in Greenwich Village on 14th Street. Best Buy is working on a Chelsea location at 23rd Street and Sixth Avenue at the edge of Ladies' Mile, and Wal-Mart is coming to Manhattan this year with a store on Eleventh Avenue in the West 50s.
Consolo says that Manhattan retail rents and sales per square foot during 1999 and the beginning of 2000 have been at a 10-year high. Looking at sales, "Parts of Madison Avenue were achieving $1,000 per sq. ft., and Fifth Avenue is up to $750 per sq. ft.," she says. The average rent per square foot for retail space in Manhattan was $77 at the beginning of this year, according to Garrick-Aug. Slightly more than 4 million sq. ft. was available.
While the traditional luxury shopping streets set records, formerly secondary neighborhoods are establishing more upscale identities by attracting trendy stores and restaurants. Last year saw Nolita, the area North of Little Italy, become a SoHo spillover. The gentrification of the Flatiron District has moved westward into Chelsea's gallery district and now the Meatpacking District to the south. "The boundaries have expanded because of the high demand from all who want to be here," she says.
New York's retail real estate market is also benefiting from the increase in residential and commercial construction projects around the city. "People are moving back into the city in new residential developments, and they need goods and services," says Consolo. This trend is bringing larger groceries and food stores to the city, such as Fresh Fields, a Washington, D.C.-based food chain that is opening an approximately 50,000 sq. ft. store on Seventh Avenue and 24th Street in Chelsea.
Tourism boosts hotel sector "The city is obviously having a fantastic year," says Michael A. Fishbin, a partner in the New York office of Ernst & Young, ticking off a list of New York City's advantages. "The economy is robust. New technology firms have been driving a lot of the real estate assets as well as the continued strength of the capital markets. Tourism is at an all-time high, with record visitation reported from New York's Chamber of Commerce. The quality and desirability of Manhattan as a place to visit is incredible," Fishbin adds.
All of these factors are helping to drive up occupancy and average rates for the city's hotels. Despite the fact that capital sources view the hotel sector less favorably than other commercial real estate sectors today, several new hospitality developments and refurbishments are in progress or proposed in practically all parts of Manhattan.
The city's hotel occupancy rates are exceeding industry expectations. As of mid-year, they were 6 occupancy points ahead of 1999. "We had an extremely strong summer, which is historically a slower period," says Fishbin. He expected 2000 to be a record year for Manhattan hotel occupancy, which should average 83% to 84% by year's end, exceeding previous high levels set in 1998.
Average rates also have surpassed predictions. "We've been blown away, as we have continued to see strong growth," says Fishbin. Average rates are up a little more than 8% from last year, standing at $225 for the first seven months of this year. Due to such strong demand, hotels often are able to price rooms on a daily basis, like airline seats, he notes.
All of the favorable statistics have not succeeded, however, in making hotels more palatable to lenders, says Fishbin. "The enigma is that the capital markets are probably being overly conservative with lodging assets," he says. This factor serves to squelch the level of the city's hotel sales and purchases.
There have been several significant openings of new and refurbished facilities in the past year, however, and several projects are proposed to come on line in the near future. The New York Times reports that more than 3,000 new hotel rooms will open in Manhattan in 2000, increasing the overall stock to more than 63,000 rooms.
New York-based Accor North America opened the $90 million, 400-room Sofitel New York in July. The 30-story hotel is located on West 44th Street between Fifth and Sixth avenues. The Hilton Times Square, a 455-room facility at 42nd Street between 7th and 8th avenues, opened last spring.
The significant hotel projects under construction or proposed include:
l The W Guardian, at Park Avenue and 17th Street at the north end of Union Square, is anticipated to open by year end, marking the fourth W Hotel in Manhattan. The 270-room hotel represents the conversion of the Guardian Life Building, overseen by the locally based Related Cos. and White Plains, N.Y.-based Starwood Hotels at a cost of about $60 million.
l An 860-room Westin Hotel is under construction at 8th Avenue between 42nd and 43rd Streets, as part of the E-Walk multi-use complex there. Developed by New York-based Tishman Hotel Corp., the facility is expected to open in spring 2002, according to Ernst & Young, and will be managed by Starwood Hotels and Resorts.
l The Related Cos. also plans to develop a $200 million luxury hotel as part of the Time Warner Center mixed-use project. The 250-room hotel is expected to be completed by late 2003 and is to be managed by Mandarin Oriental.
"Says Fishbin,. "The new supply will be absorbed, and New York will continue to have one of the highest occupancy rates in the country, if not the world."