NEW YORK CITY-As large blocks of space continue to get gobbled up in Midtown and Midtown South, large transactions are helping to boost net-effective office rents Downtown. According to Studley’s 2012 Effective Rent Index, total rent posted its first gain since 2007 in Lower Manhattan, spiking by 18.1% to $41.34, spurred by a 49.9% spike in net rent to $18.42.
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Erik Schmall, executive managing director at Studley, tells GlobeSt.com that the increase was “driven solely by the Conde deal that was done Downtown,” noting that the luxury magazine publisher’s landmark one-million-square-foot-plus trans at One World Trade Center is already having a material impact on the surrounding neighborhood. “I don’t know if this would be a positive number if it were not for this deal.”
As a result, tenant effective rent jumped by 21.8% to $26.99 this year, a huge jump from 2010 when landlord effective rents barely covered building expenses, clocking in with a rate of 71-cents. In 2011, it bounced off the bottom, rising to $5.08.
While other brokerage shops have said that Conde’s announcement hasn’t dragged asking rents up or down, Schmall says the mega transactions impact the net effective index in a much bigger way. “All the larger deals—like Oppenheimer, Conde—were done at rental rates in premium buildings, as opposed to some of the deals we did in other buildings,” he explained, noting that while Lower Manhattan offers a “significant discount from Midtown,” much of the older product is still struggling to lease up.
Concession packages rose by 11.8% to $104 this year, due largely to the surge in net rent. “There was a lot of a lot of commoditized space in Downtown Manhattan,” he says. “Unlike Midtown Manhattan, the difference between a whole basket of buildings are not that different. Besides the stuff that’s being built there right now, there’s not a lot of class A product, so everything else falls into the category of no great light and views unless it is on the water,” noting that concessions are still high for non-new construction.
“I still think there is a big overhang of space Downtown, and I think the market is going to stay relatively flat in the immediate future,” he adds.
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Midtown offers a slightly different picture. “Asking rents have creeped up, but taking rents are still relatively flat though,” Schmall says. Total rent rose for the first time since 2008, spiking by 27.6% to $75.30. Net rent jumped by 55%, averaging $43.25 during 2011, according to Studley.
“There’s pockets of very strong demand in Midtown, mostly for the high-echelon, high-quality space,” he says, explaining that the next pocket of ‘real strength’ is the city’s Silicon Alley in Flatiron, Chelsea and the Far West Side. “That industry is really pushing pricing.”
Citywide, pricing is beginning to creep up, but Schmall sees no real increase in demand. “You have a workforce in New York City that has become so specialized that the space people look to accommodate them for is usually the better space,” he says. “If you get the space that is the plain old office space straight shooting. It could be a typical 15th floor in a Third Avenue building. There’s nothing wrong with it, but it’s hard to lease.”
The European debt crisis, uncertainty on Wall Street and the upcoming election are also factors in the way in which tenants are taking space, he adds. “There’s a big pause and people are waiting to see what happens in the world. You have an election coming up and have an economy that no one can figure out if it’s going to be popping out of a recession or it isn’t. And I think you have a lot of players on the sidelines because of that.”
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