Midtown Manhattan office landlords losing power to drive rents

Midtown Manhattan office landlords are losing some power to set rents on their properties, even in the prized Park Avenue corridor, after five years of aggressive price-pushing.

Tenants at top-quality offices in Midtown paid 7.4 per cent less in February than at the end of last year, after a 13.3 per cent increase for all of 2015, according to data from research firm CompStak. Landlords including SL Green Realty, Manhattan’s biggest owner of office towers, have lowered asking rents in some of their most desirable buildings. Others are holding the line.

“With all the market uncertainty, there may be a ‘let’s meet the market’ mentality by landlords,” said Scott Rechler, chief executive officer of RXR Realty, which is keeping rents steady in the nine Midtown skyscrapers it controls. “Whereas last year, it was ‘let’s move the market, let’s lead the market.’”

Midtown landlords, accustomed to having the upper hand in leases in the largest and costliest US office market, face the prospect of a slowdown in demand amid the stock-market slide, added competition from new skyscrapers, and a sense that the pace of job growth cannot keep up. With cost-conscious employers packing more workers into tighter quarters, it was time for building owners to lower their sights a bit, said Heidi Learner, chief economist at brokerage Savills Studley.

“We’re now in year seven of a recovery, and by my calculations, we’ve added some 150,000 office workers” in the city, she said. “It’s been a very robust recovery, but we’re occupying less space. And now we’re pretty certain employment growth is not going to keep to that pace.”

Not everyone who studies the market shares that view. Richard Persichetti, Northeast research director at Cushman & Wakefield, is among those who say evidence is too scant to signal a decline and that rents still have room to run.

“We’re not seeing a softening of demand at all,” Persichetti said. “Some spaces have had price adjustments down, but that is typical,” while landlords have been raising asking rents on other offices.

About 2.7 million sq ft of Midtown offices were leased in the first two months of this year, more than the 15-year average of 2.5 million sq ft, Cushman data shows. Asking rents – what landlords seek before negotiations with tenants – rose 2 per cent from the end of last year, the brokerage said.

CompStak’s data paints a different picture of the market this year. Taking rent – what tenants agreed to pay after any landlord concessions, such as free-rent periods and allowances for space upgrades – fell to US$78.19 a square foot on average last month, from US$84.44 at the end of last year, the research firm said. Starting rent, the amount without incentives, dropped 6.1 per cent to US$81.63 a square foot.

“The pullback in rents is not very surprising, given the overall volatility in the domestic financial markets, as well as questions around growth in China,” Blake Toline, a CompStak research analyst, said. The end of the first quarter “will have to be very strong for the quarter-over-quarter growth rate not to be negative”.

SL Green and Vornado Realty Trust, co-owners of 280 Park Avenue, recently lowered asking rents more than 10 per cent for space on the middle floors of the 43-storey tower, to US$95 to US$99 a square foot, a source said. A space on a lower floor was trimmed to US$88 from US$95, while an office on the 40th floor was reduced to US$135 a square foot from US$140, the source said.

Steven Durels, SL Green’s director of leasing, called the figures “fairly accurate”. He said the cuts reflected nothing more than what was right for the particular property and that the prices were still among the highest anywhere in the United States.

“We didn’t reduce every space in the building,” Durels said. “We had a handful of spaces where, in all honestly, we were probably priced heavy for the market, and adjusted accordingly.”

SL Green also dropped asking rents at 10 East 53rd St to US$100 a square foot from US$110 on an upper floor and to US$90 from US$95 on a middle floor, Durels said. At another of the landlord’s prime buildings, 1350 Avenue of the Americas, rent for the 27th floor was cut to US$87 a square foot from US$92.

Across all of SL Green’s properties, “leasing velocity is extremely robust” and on pace to exceed its fourth-quarter total, Durels said. He said the company had raised rents at the Graybar Building, next to Grand Central Terminal.

While reductions had not been large, they reflected “a change of sentiment on the part of landlords”, Learner said. “We would never say there’s widespread panic going on.”