Office Rents Will Continue Rising

NEW YORK CITY—Brokerage firm Savills Studley says that office rents in Manhattan rose for the fourth year in a row last year, but are in some cases still considerably below peak rates achieved in 2007.

Savills Effective Rate Index report released today indicates that leasing in Downtown in 2014 was the strongest since the late 1990s as tenants seized value plays in Lower Manhattan. Downtown leasing totaled 4.5 million square feet last year, a major increase from the 3.1 million square feet leased in 2013, the report states. Total taking rent jumped by nearly 10% to $50-per-square-foot for the first time since 2008.

Tenants paid more for premium space as tenant effective rent rose by 8.4% to $37.71-per-square-foot. Tenant effective rent in 2014 was 25.4% below its 2007 peak of $50.58-per-square-foot. The average initial taking rent for premium Class A space Downtown rose to $51.65-per-square-foot in 2014, which was less than $10.00 below its 2007 peak of $61.07-per-square-foot.

Landlord effective rent Downtown jumped by 18.7% to $14.61-per-square-foot in 2014 but was still about half its peak of $29.20-per-square-foot in 2007. The landlord's bottom line was still well below its prior peak because concessions remain elevated—the average value of concessions rose by 8.8% in 2014, keeping pace with rental rate growth, the Savills Studley report states.

In its outlook for the Downtown district, the report states, “The next several quarters are likely to bring lower deal volume but at higher taking rents—most of the Class A space remaining is either existing space east of Broadway now priced above $50.00-per-square-foot or new space/rehab space priced at $60.00-per-square-foot or more. Nevertheless, with a lot of big blocks to fill, landlords are not expected to pull back very much on concessions.”

In Midtown Manhattan, tenant effective rent rose by 7.5% to $63.66-per-square-foot. Compared to other top U.S. CBDs, Midtown's increase was actually about half the national increase of 14.9%. The report notes that Midtown's effective office rental rate at the end of 2014 was still 31.5% (nearly $30.00) below the peak rate of $92.93-per-square-foot in 2007. The demand for smaller, high caliber space from private equity funds in the Plaza District fueled what the brokerage firm described as the largest number of leases for more than $100-per-square-foot since 2008. However, the report also notes that “Midtown's larger Class A tenants still pursued cost-cutting and either shed space or relocated to Lower Manhattan, tempering demand in 2014.”

The value of concession packages rose 7.6% last year. As a percentage of total rent, amortized concessions rose from 21.3% in 2013 to 23.0% in 2014. Demand in Midtown was still a bit spotty during 2014, particularly among larger corporate tenants, the report states. Growth was due mainly to stronger demand at the top of the market for a limited amount of view space. Specifically, the willingness among hedge funds and private equity firms to pay a premium for limited amount of view space in Plaza District boosted 2004's office rent average.

Savills Studley notes that it remains to be seen if Midtown will benefit in the next several quarters from more limited availability of value plays in Lower Manhattan.

“Another set of new properties on the Westside could continue to pick off major tenants from Midtown East—new product in Hudson Yards and Manhattan West offers space that is much more efficiently configured and will be loaded with amenities at pricing that is not exorbitant relative to older Avenue of the Americas properties,” the report states.