NEW YORK CITY-The most expensive street in the US for office space is no longer one of the tower-lined boulevards of Manhattan, but Sand Hill Road in the Bay Area city of Menlo Park, CA. For the moment, at least, that doesn’t mean that Manhattan has given way to a new leader, according to a new report from CompStak.
However, the report by research analyst Rob Maxwell says, “New York landlords shouldn’t feel too comfortable on top. While average rents are converging quickly, differences in the tenants and the markets themselves may mean that San Francisco and New York are more alike than their starting rents suggest.”
While the difference in average starting rents between the two cities has reached about $10 per square feet, CompStak’s Maxwell notes that the difference diminishes by about 40% when factors such as rent escalations, free rent and tenant improvement allowances are factored in. Further, the differences in the tenant bases between the two cities—Manhattan is typically home to “stodgier industries” such as finance and legal services, while San Francisco is more likely to attract growth firms and tech startups—means that the leases in Manhattan tend to run longer. The longer leases have built-in premiums that drive market prices up.
The difference is especially narrow when comparing Midtown South, home of Silicon Alley, with the tech sector in San Francisco. “Midtown South’s starting rent trend since 2007 is much closer to San Francisco’s starting rent than to the adjacent submarket, Midtown Manhattan,” Maxwell writes. “In fact, Midtown South’s rent trend since 2007 correlates with San Francisco’s rents at a whopping 88%.”
A key differentiator in pricing is retail in the two cities. Retail rents in New York City are “astronomically expensive,” the report states—far more so than on the West Coast. “But as San Francisco rides the fast growing technology industry to higher and higher rents, New York’s perch atop the commercial real estate ladder may soon be wobbling.”