NEW YORK CITY—Losses incurred by large hedge funds as well as the closure of some significant individual hedge funds are showing signs of affecting rents in the Midtown office market.
Brokerage firm JLL in a report on the hedge fund sector's impact on the Midtown office market states that volatility in the hedge fund arena is weighing on Class A office landlords there.
"Many large funds ($5 billion and higher in assets under management) are experiencing losses and individual fund closures, and despite the bearish outlook maintained by many analysts and investors, relatively nascent and small funds (less than $5 billion in AUM) attracted 50% of the $76.4-billion invested in 2014," the report states.
Small fund hedge fund investment in 2014 spiked 13% higher than the 37% posted in 2013. JLL lead report author Cynthia Wasserberger contends that there is a correlation between the positive or negative trajectory of hedge fund performance and Midtown Class A office rent growth. Wasserberger, a managing director with JLL, states that normally hedge fund growth will contribute to a healthy financial services sector and will therefore cause office landlords to be optimistic about market conditions and ask for higher rents.
She says that prior to the recession the lag time between positive hedge fund performance and rent growth was tight. Heady hedge fund conditions caused office rents in Midtown to rise, leading to the district's peak in 2007.
"Now post recession, the peaks and troughs are wider apart, indicating lag times ranging from 1.5 years to 2 years," she states. "Landlords may be more cautious, as the market has not experienced the same spike in rent growth as it did pre-recession."
The JLL report notes that the tempered rent growth that now exists in Midtown may be due to the weaker performance by the large hedge funds. Wasserberger says the losses by the large hedge funds may be influencing the players in the trophy real estate asset sector, while not having as much of an impact on the broader real estate market in New York City.
Among the notable financial services lease deals in Midtown of late include the 51,032-square-foot lease renewal at 787 Seventh Ave. by New Mountain Capital and the 32,631-square-foot lease by HQ Capital at 1290 Ave. of the Americas.
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