Average effective rental rates for Class-A office space in Midtown Manhattan have surpassed the all-time high rental rates reached during the dot-com peak at the end of 2000. According to the Studley Effective Rent Index (SERI) covering Midtown and Downtown, Midtown’s spike in rental rates is due to a number of real estate components impacting pricing, namely higher real estate taxes, operating expenses, and electricity costs, not to mention supply and demand.
The national SERI report indicates rental rates are steadily increasing in markets throughout the United States, and Midtown Manhattan follows suit, although its effective rental rates are markedly higher than in most other major tier-one markets.
Midtown New York’s average rent of $75.42 per sq. ft. is 1.2% higher than 2001’s peak rate. Downtown New York’s average effective rent of $40.95 per sq. ft., however, is 18.2% lower than the peak value, not even close to the levels achieved during the dot-com heyday.
“The entire business landscape has changed since 2000,” says Steven Coutts, senior vice president of Studley’s National Research Services. “Prime office buildings have been trading for amazingly high prices for several years with landlords garnering higher rents as a result of the dearth of product in Midtown. It’s a domino effect — the increase in building revenue escalates the building’s value leading to higher property taxes thereby increasing the total rent even more.”
Operating expenses have also increased over the last five years, says Coutts, who attributes some of this to the added security in buildings post 9/11. From 1995 to 2000, average operating expenses increased from $6.75 per sq. ft. to $7.82 per sq. ft., a 16% increase, but operating expenses increased by 30% in the succeeding five-year period between 2000 and 2005.
“Interestingly, average increases in electricity costs over the past 10 years have been moderate, averaging 3.1% annually,” adds Coutts. “But in the last year, average costs jumped by 13.5% as the nation grapples with the current energy crisis.”