For quite some time now, there has been no higher standard for office space in Manhattan than buildings in Midtown’s core – from Broadway to Lexington Avenue. These buildings, within walking distance of Penn Station and Grand Central, command by far the highest rents and loftiest sales prices in the city. Retail, hospitality and residential properties in the heart of Midtown also sell for top dollar.
Midtown Manhattan real estate remains one of the most prized assets in the world, but 2015 could be seen as a tipping point for Midtown’s office leasing market. Midtown is at risk of being knocked off its pedestal as a “must-have” location for office tenants. The rapid pre-leasing of space in Hudson Yards in 2015 was truly remarkable; some have characterized KKR’s purchase of the top 10 floors at 30 Hudson Yards and abandonment of the top floors at 9 W. 57th Street as a “culture change.” At the very least, KKR’s move is further proof that the Plaza District is losing some of its aura as the exclusive choice for private equity firms.
Such changes have been years in the making. Hudson Yards’ recent success is the culmination of several years of extensive relocation activity among tenants. Demand is dispersing across Manhattan and the metro region as tenants tap into options all over the island, and a few move to Northern New Jersey or the Outer Boroughs. As the center of gravity in the office sector is pulled in multiple directions, a long list of buildings in Midtown’s core must rethink their leasing strategy and reposition accordingly.
Excluding tenants with very specific lease requirements, most businesses seeking traditional Class A space options will benefit from a widening field of options – ranging from brand new buildings in Lower Manhattan or Hudson Yards, to big blocks of space in existing buildings along Avenue of Americas. Additionally, as development and adaptive re-use activity in Northern New Jersey and the Outer Boroughs gains traction, businesses willing to relocate some or all of their operations across the rivers stand to capture substantial savings on real estate costs. In general, with more landlords competing with one another to lease space, some of the moderation in effective rents seen in select buildings could become more widespread by the second half of 2016.