After Manhattan’s Banner 2013, Experts Await an Encore
- Jan 16, 2014
“I think we can cheer about 2013 and feel pretty good about 2014.” That was how Ron Lo Russo, president of Cushman & Wakefield Inc.’s New York Tri-state region, summed up the outlook Tuesday morning at a briefing in Midtown Manhattan. Year-end assessments confirm that the nation’s largest real estate market recorded a robust performance on multiple fronts as development in the office sector and other areas rebounded around the country.
In Manhattan’s retail sector, 2013 was “a year of big deals, and it was a year of rents that followed the big deals,” said Gene Spiegelman, a Cushman & Wakefield vice chairman. High-profile transactions included a 67,000-square-foot extension for Crate & Barrel at 650 Madison Ave. and H&M’s commitment to a 63,000-square-foot store at Herald Center that will be the retailer’s largest in the world.
In Manhattans’s priciest retail market, Upper Fifth Avenue, asking rents hit $2,513, a 10 percent year-over-year increase. But SoHo scored the biggest hike, a 53 percent increase that brought average asking rents to $480 per square foot. Speigelman credited the growth in part to tourism—54.3 million visitors, including 11.4 million who came from outside the United States, both records. And Manhattan’s per capital income of about $131,000 is 133 percent higher than average income in San Francisco, Boston, Washington, Chicago, Los Angeles and Miami, according to Moody’s Analytics.
The investment market also boomed in 2013. By the end of the year, $37 billion worth of office properties had traded or were under contract—the highest volume since the peak year of 2007. Class A office product in Midtown Manhattan commanded $1,060 per square foot last year, which topped the average price of $941 in 2008. That led to an obvious question: Is another bubble forming?
“Our response is, ‘Not really,” said Helen Hwang, an executive vice president in Cushman & Wakefield’s capital markets group. The crucial difference, she said, is lower interest rates. The spread between 10-year borrowing rates and cap rates today is typically 150 to 200 basis points. As a result, she said, investors are paying more, “but they’re also making more money on their equity.” Today’s office investors prefer core office product that is at least 90 percent occupied and leased to credit tenants, Hwang added. Also selling briskly are land, which accounted for 21 percent of sales volume last year, and high-end condominiums, which are fetching up to $3,000 per square foot.
For Manhattan’s 400 million-square-foot office market, 2013 was marked by apparently contradictory trends. “Things that shouldn’t happen together, happened together last year,” said Ken McCarthy, Cushman & Wakefield’s chief economist for the Tri-state region. Leasing reached 37 million square feet, the second highest total of the past decade. Average asking rents rose 6.5 percent last year even as vacancy posted a 200 basis-point increase. The answer, McCarthy explained, is 4 million square feet of new product. His prediction: “I think this year we’ll see the first $100 (per square foot) rent outside of Midtown.”
Downtown turned out to be the Manhattan’s biggest office leasing success story of 2013. Volume in the district jumped 27 percent year over year, to 5.7 million square feet, according to figures released on Monday by CBRE Group Inc. In a major turnaround, Downtown rebounded from 3.2 million square feet of negative absorption in 2012 and recorded 630,000 square feet on the plus side. This year’s completion of One World Trade Center and the Fulton Street Transit Center, and the World Trade Center Transportation Hub—should continue the forward momentum.
Only Midtown South, the smallest of Manhattan’s three major submarkets, experienced a decline in leasing volume last year, from 5 million to just under 4.2 million square feet, and 220,000 square feet came back on the market, CBRE noted. But Midtown South remains the tightest central business district in the nation, and it was also the site of Manhattan’s biggest office lease of the year—Citigroup’s renewal last month of close to 2.6 million square feet at 388 and 390 Greenwich St.
Only five other markets besides Manhattan absorbed more than 2 million square feet of space last year: Atlanta, Dallas, Houston, Orange County, Calif., and the San Jose/Silicon Valley, according to a report released last week by Newmark Grubb Knight Frank. Nationwide, the office sector added 30 million square feet of office inventory last year—17 million square feet less than the market absorbed.
Those trends helped lower the national office vacancy rate by 60 points to 15 percent. Asking rents edged up 3.5 percent nationwide as increases of 5 percent or higher were recorded by Austin, Texas, Boston, Dallas, Fairfield County, Conn., Oklahoma City and San Francisco. “In 2014, we anticipate the office market will tighten, but not at a rapid pace,” said Robert Bach, NGKF’s chief economist for the Americas, in a statement. “Expect vacancy to end the year around 14.5 percent and rental rates to increase by 4 percent.”