Office Tenants Skim the Cream

NEW YORK CITY-To get a clear indication of the “flight to quality” principle in action when it comes to Manhattan office leasing, consider the Plaza District, where total available class A space has declined 18.6% since the start of the year. “The market is separating into two tiers as tenants winnow out the gems and the big blocks of space, leaving behind a hodgepodge of spaces of varying quality,” according to tenant-rep firm Studley in its second-quarter report on the market.

Meanwhile, Q2 and monthly reports all point to the same thing: leasing velocity has maintained the high velocity it began to establish last summer. CB Richard Ellis notes that leasing volume for July exceeded the five-year average in all three submarkets—63% above average in the case of Downtown—while Studley observes that the island’s Q2 volume of 9.6 million square feet was the highest quarterly volume since 2000.

Helping drive that velocity, though, has been a sense among tenants that the leasing market continues to offer bargains. A national report from Studley says Manhattan suffered the steepest quarterly decline in asking rents among the major submarkets, with a 3.8% drop. Jones Lang LaSalle’s Q2 report puts the average ask in Manhattan at $52.08 per square foot, while Newmark Knight Frank, using a different yardstick, says it’s $43.77 per foot.

Ninety percent of the leases signed during the past several quarters came with initial asking rents of $40 to $75 per foot, according to Studley’s Manhattan report. “The $100 asking rent is making a comeback in a few of Midtown’s trophy properties but is a distant memory for most buildings,” the report states.

Another verity of the market in former years, the dominance of financial and law firms in large leases, has also gone by the boards. Although the largest Q2 deal in Manhattan was signed by a law firm—Proskauer Rose, which committed to 406,399 square feet at SJP Properties’ forthcoming 11 Times Square—Studley notes that “the market has become more variegated” in the flight to quality.

In fact, of the quarter’s five deals for 250,000 square feet or more, only two involved law-firm tenants and none were inked by financial firms. Besides Proskauer Rose and law firm Wilkie Farr & Gallagher, which renewed its 355,118 square feet at 787 Seventh Ave., the other mega-lease tenants were Jones Apparel Group with a 380,000-square-foot renewal and expansion at 1411 Broadway; union local 32BJ SEIU with 283,162 square feet at 620 Ave. of the Americas; and Tiffany & Co.’s relocation into 257,415 square feet at 200 Fifth Ave.

Helping drive both that greater diversity and the high volume of leasing here has been Manhattan’s rebound from the downturn. With 19.2% of the office-using jobs lost during the Great Recession now restored, it’s well above the national average of 7.3%. However, Studley cautions that “recent turbulence in the global and domestic economy” could hamper job growth for the balance of 2010.