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Market Analysis

Midtown South Major Market Analysis:

Canal Street to 42nd Street
River to River:

Third Quarter, 2008 Analysis

TThe Midtown South market is composed of the following submarkets: Port Authority/Penn Station/Garment, Murray Hill, Chelsea, Flatiron/Gramercy Park, Greenwich Village/SoHo, East Village, and Union Square. We divide the buildings in these submarkets into four classes. Class A consists of buildings built after 1969. Class B are buildings built between 1931 and 1969 possessing older infrastructure. Class C buildings are those buildings built prior to 1931 and over 250,000 sq ft in size. Class D buildings are those built prior to 1931 but are less than 250,000 sq ft in size. The inventory of the Midtown South market is primarily comprised of Class D buildings as demonstrated in the table below:
 
Building Class Inventory Sq Ft
(in ‘000s)
% of Total
Inventory
Availability Sq Ft
(in ‘000s)
% Vacancy Avg Asking Rate ($/psf)
A 11,938 8% 722 6.0% $94.64
B 25,459 16% 1,984 7.8% $55.95
C 45,481 28% 2,891 6.4% $55.05
D 77,121 48% 2,917 3.8% $49.34
Total 159,999 100% 8,513 5.3% $56.66

Key takeaways from our review of the quarter include:

Midtown South’s average asking rate showed a sequential decline and continued growth deceleration.  We have now completed the fourth full quarter of results since the onset of the credit crisis in 3Q07, and the current quarter represents the first quarter that saw a sequential decline in asking rates since that time in the Midtown South market. The Midtown South average asking rate fell $0.15 psf from 2Q08, to $56.66 psf, however, this still represented 3.5% y/y growth in the quarter. The decline from last quarter was a modest 0.3%, though the y/y growth has decelerated sharply from 11.3% y/y growth last quarter and peak growth of 17.9% y/y in 4Q07. The decline in the asking rate was driven by declines in Class B, C and D buildings, with the most significant occurring in Class D properties, which accounted for 48% of total inventory and 34% of total availability in the market at quarter end. The Class D average asking rate fell $3.06 psf, or 5.8%, from last quarter to $49.34 psf, driven primarily by a reduction in the direct asking rate. Reduction in the Class C and B asking rates were more modest at $0.82 psf and $0.06 psf respectively. These reductions were partially offset by a sizeable increase in the Class A asking rate, though at only 8% of availability, Class A properties did not account for enough of the market to offset the decline in the other building classes. The increase in the Class A asking rate was driven by an increase in sublease availability at 1095 Ave of the Americas from 12K sq ft last quarter to 83K sq ft in 3Q08. Both iStar Financial and MetLife took space in the building at the top of the market, but both have recently announced plans to sublease some or all of their space. iStar’s space amounts to 107K sq ft, while MetLife’s commitment is a much larger 400K sq ft. It remains to be seen if more of the space from these two tenants is added to the market in coming months. The new sublease space at the building is offered at an average asking rate of $145.00 psf. The increase in sublease availability drove a $30.47 psf increase in the average Class A sublease asking rate to $104.49 psf, and resulted in an increase in the total average Class A asking rate $10.30 psf to $94.64 psf. This increase in the Class A rate has increased the premium for Class A space to 69%, down from a low of 51% last quarter. This premium had been on a steady decline since 2Q06, when 1.0M sq ft of space at 1095 Ave of the Americas first came on the market at $90.00 psf. At that time, the Class A rate was at a 111% premium to Class B space. As space at this property was leased over the subsequent eight quarters, its impact on the Class A asking rate was reduced. However, during 3Q08, availability at this property increased by 95K sq ft, primarily in sublease space, at a total average asking rate of $136.02 psf. As is usual, Class B, C and D properties continue to show asking rates in a fairly tight range, from $49.34 psf to $55.95 psf.

3Q08 average asking rate results by building class include:
 

  • Class A buildings saw a 3.0% y/y decline to $94.64 psf, though this y/y decline was actually an improvement from the 10.9% y/y decline witnessed in 2Q08. The asking rate in the quarter represented a $10.30 psf over last quarter’s rate.
  • Class B buildings saw 3.6% y/y growth to $55.95 psf, a deceleration from 12.6% y/y growth in 2Q08 and a $0.06 psf decrease from last quarter’s rate.
  • Class C buildings saw 14.4% y/y growth to $55.05 psf, a deceleration from 31.3% y/y growth in 2Q08 and a $0.82 psf decrease from last quarter’s rate.
  • Class D buildings saw 9.9% y/y growth to $49.34 psf, a deceleration from 26.7% y/y growth in 2Q08 and a $3.06 psf decrease from last quarter’s rate.

Vacancy increased after dip in 2Q08. 
Vacancy in the quarter reached 5.3% in the Midtown South market, after falling to a near record low of 4.6% in 2Q08. 3Q08 vacancy was up 73 bps over last quarter, and up 26 bps y/y. Unlike the Midtown market, most of the increase in Midtown South vacancy occurred in direct availability. The increase represented a 1.17M sq ft increase in availability, driven primarily by a 641K sq ft increase in Class C direct availability and a 354K sq ft increase in Class B direct availability. The resulting increases in total Class C and B availability were significant, as they were up 20.7% and 23.8% over last quarter respectively. Properties that contributed meaningfully to the Class C availability increase include 350 Fifth Avenue (up 222K sq ft to 383K sq ft of total availability) and 1140 Broadway (up 112K sq ft to 135K sq ft total), while properties that contributed to Class B availability include 855 Avenue of the Americas (up 332K sq ft for a total of the same amount) and 605 Third Avenue (up 134K sq ft to 142K sq ft total).

The increase in direct availability had the effect of increasing the proportion of available space attributable to direct availability slightly to 83.8% from 83.0% last quarter. However, in Midtown South, sublease availability is offered at near par with direct availability, so the shift in the type of availability had a minimal impact on the pace of asking rate growth in the quarter.

3Q08 vacancy results by building class include:
 

  • Class A vacancy increased to 6.0%, up 124 bps since last quarter, but still down 256 bps y/y. The increase represented a 148K sq ft increase in availability, driven by a 123K sq ft increase in sublease availability.
  • Class B vacancy was also up to 7.8%, up 150 bps over last quarter and up 90 bps y/y. The increase represented a 381K sq ft increase in availability driven by a 354K sq ft increase in direct availability.
  • Class C vacancy was up to 6.4%, up 109 bps over last quarter, but still down 41 bps y/y. The increase represented a 495K sq ft increase in availability driven by a 641K sq ft increase in direct availability, partially offset by a 146K sq ft decrease in sublease availability.
  • Class D vacancy was up to 3.8%, up 18 bps over last quarter and up 88 bps y/y. The increase represented a 142K sq ft increase in availability driven by a 125K sq ft increase in sublease availability.

From a submarket perspective, vacancy was up in the third quarter for five of the seven submarkets. Submarkets that saw vacancy increases were Union Square, Port Authority, Murray Hill, Greenwich/Soho and East Village, while the Flatiron/Gramercy and Chelsea submarkets both saw vacancy declines. It is worth noting that all seven submarkets are showing vacancy results up from prior lows at some point during 2007.

Net absorption turned negative, both in the quarter and on YTD basis. 
We analyze net absorption (leased space less newly available space) in the market as a measure of the relative strength of demand relative to new supply. Net absorption for the Midtown South market was negative 1.17M sq ft in the quarter, which was caused by 1.9M sq ft of leased space more than offset by 3.1M sq ft of newly available space.

3Q08 results represent a return to the dramatic y/y reductions in leasing activity witnessed in the first quarter, after a period of strong leasing in 2Q08. Leased space in the quarter of 1.9M sq ft was down 28% y/y. This occurred at the same time that newly available space grew 20% y/y. The decline in leased space is at least partially due to timing, as 2Q was a strong leasing quarter in the current year, vs. strong quarters of leasing in 1Q and 3Q last year. An analysis of YTD absorption evens out some of these timing issues and shows YTD leasing activity up 14.2% for the first three quarters of the year to 8.8M sq ft, up from 7.7M sq ft last year. However, growth in YTD newly available space outpaced growth in leased space, with 78% y/y growth to 9.0M sq ft, up from 5.1M sq ft last year. This resulted in YTD net absorption of negative 268K sq ft vs. positive net absorption of 2.6M sq ft for the first three quarters of 2007.

Much like the Midtown market, the Midtown South market experienced a period of significant positive absorption near the peak of the market in 2007. In the first quarter of 2007, Midtown South absorption was positive 3.4M sq ft, resulting in a drop in market vacancy to a record low of 4.5% from 6.7% in the prior quarter. It is worth noting that, despite predominately negative absorption since that time, total vacancy in the market at 5.3% is still well below the vacancy level in 4Q06, just prior to the last period of significant positive absorption. This suggests there is some support for the minimal reductions we have seen in average asking rates as market supply has not yet increased beyond 2006 levels, which was a period of double digit asking rate growth in the market..

 Summary:
 

Total Inventory 160.0 MM sq ft 1510 buildings
Class A (1969-current) 11.9 MM sq ft 34 buildings
Class B (1931-1969) 25.5 MM sq ft 102 buildings
Class C
(before 1931>250,000 sq ft)
45.5 MM sq ft 109 buildings
Class D
(before 1931<250,000 sq ft)
77.1 MM sq ft 1265 buildings

3Q 2008 Asking Rates:

Class A B C D Wtd Avg
Direct $90.15 57.33 55.96 49.80 56.34
Sublease 104.49 46.00 42.66 46.14 56.45
Wtd Avg 94.64 55.95 55.05 49.34 56.66

3Q 2008 Asking Rates vs. 2Q 2008:
 
Class A B C D Wtd Avg
3Q 2008 Wtd Avg $94.64 55.95 55.05 49.34 56.66
2Q 2008 Wtd Avg 84.35 56.02 55.87 52.40 56.82
  10.29 (0.07) (0.82) (3.06) (0.16)

3Q 2008 Asking Rates vs. 3Q 2007:
 
Class A B C D Wtd Avg
3Q 2008 Wtd Avg $94.64 55.95 55.05 49.34 56.66
3Q 2007 Wtd Avg 97.54 54.00 48.11 44.88 54.77
  (2.90) 1.95 6.94 4.46 1.89

Completed transactions.  The fifteen largest lease transactions completed in the Midtown South market in the third quarter of 2008 are as follows:

 

Address

Tenant Square Feet
1 350 Fifth Avenue Coty 90,000
2 200 Varick Street Omnicom 80,000
3 620 Ave of the Americas Cole Haan 28,000
4 1400 Broadway Ellen Tracy 28,000
5 350 Fifth Avenue Skanska USA Building 24,391
6 1359 Broadway Actimize 23,600
7 100 Fifth Avenue DeVito/Verdi 22,500
8 435 Hudson Street Epoch Films 15,000
9 100 Ave of the Americas DST Systems 14,658
10 345 Hudson Street The Solomon R. Guggenheim Foundation 13,000
11 375 Hudson Street Weidlinger Associates 12,609
12 229 West 28th Street ADT Security Services 12,500
13 245 Fifth Avenue Broadband Enterprises 12,000
14 60 Madison Avenue Material ConneXion 12,000
15 1350 Broadway Open Space Institute 12,000


 


Charts
 [click to enlarge]

 


Absorption
[click to enlarge]

 


Supporting Market Detail
[click to enlarge]

 
For further information contact:
M. Myers Mermel
Chief Executive Officer
(212) 943-7777
Caroline McLain
Chief Financial Officer
(212) 943-1902

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