Re-thinking Third Avenue

Savills Studley Insights
September 21, 2015
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We compare the available stock of office space along Third Avenue versus the availability of space within the balance of the Grand Central submarket. We find that leasing activity along the Third Avenue corridor has accelerated, especially among Class B/C buildings. Despite the relatively low level of current availability, we think that Class B/C space along Third Avenue represents one of the last “value plays” in Manhattan, particularly for clients who wish to be in amenity-rich buildings close to public transportation. With an increase in the amount of higher-priced, new construction set to come online in the Downtown and Midtown submarkets, the relative attractiveness of Third Avenue is apt to grow.

There has been no shortage of media attention broadcasting the increase in Manhattan’s office supply. While many of the developers have secured the anchor tenants necessary to kick-start construction, significant supply is still to come.

Table 1.
Select Manhattan Office Projects Under Construction and Proposed, Q2 2015

Select Manhattan Office Projects Under Construction and Proposed, Q2 2015

Despite conventional wisdom that suggests that an increase in supply, holding demand constant, should bring about a decrease in prices, the increase in availability from new construction across Manhattan is likely to have the opposite effect. Why? Asking prices of new construction can be significantly above prices of comparable, but older space.

Chart 1.
Westside II Submarket

Westside II Submarket

For example, asking rents for offices under construction at Hudson Yards average $85-$105/sf—with prices up to $140/sf for higher-priced floors—whereas asking rents on all other Class A space in the West Side II submarket (Chart 1 at left) averaged $84.79 in Q2 2015. Similarly, if one excludes the available space from 1 North End Avenue and One World Trade Center, Class A office rents in the area south of Fulton and Vesey Streets averaged just under $53/sf in Q2 2015—30%-35% below average asking rents on these two newer buildings (Chart 2).

As newly-constructed offices arrives on the market, average asking rents in submarkets like Downtown and Midtown West are likely to rise—directly as a result of projects such as 1 Vanderbilt, Hudson Yards and 2 World Trade Center, which should make rents in buildings along Third Avenue that much more attractive by comparison. But even if we strip out the “new construction” effect, we think that Third Avenue buildings offer value on a relative basis.

Chart 2.
Q2 2015 Asking Rents on Class A Lower Manhattan (Downtown I) Space, $/sf

Q2 2015 Asking Rents on Class A Lower Manhattan (Downtown I) Space, $/sf

The “Third Avenue Corridor,” which we define as Third Avenue from roughly 39th Street to 57th Street (Chart 3 and Appendix I) comprises just over 22 msf. The area’s popularity has grown in recent quarters; the amount of available space along Third Avenue has fallen by roughly 50%, in contrast to space in the Grand Central submarket as a whole. Excluding Third Avenue, available space in Grand Central has expanded slightly (Chart 4).

Chart 3.
Map of Third Avenue Corridor and Grand Central Excluding Third Avenue Submarket

Map of Third Avenue Corridor and Grand Central Excluding Third Avenue Submarket

Chart 4.
Comparison: Third Avenue and Grand Central Excluding Third Avenue Available Space

Comparison: Third Avenue and Grand Central Excluding Third Avenue Available Space

A spate of leasing activity over the past several quarters has been responsible for the decrease in Third Avenue availability (Table 2), with available Class B/C space having been trimmed the most (Chart 5).

Table 2.
Recent Leasing Transactions Along the Third Avenue Corridor

Recent Leasing Transactions Along the Third Avenue Corridor

Chart 5.
Comparison: Third Avenue Class A and Class B/C Available Space

Comparison: Third Avenue Class A and Class B/C Available Space

Even with the decline in available space, however, Third Avenue asking rents have plateaued over the last several quarters (Chart 6). Whereas Class B/C rents on the Third Avenue corridor have typically been higher than asking rents on comparable grade Grand Central space, the opposite trend has materialized, with asking rents on Third Avenue space currently at a 7% discount to asking rents on Grand Central space. As recently as three years ago, Class B/C rents along Third Avenue asked more than 25% above comparable space in Grand Central.

Chart 6.
Asking Rents on Class B/C Office Space ($/sf)

Asking Rents on Class B/C Office Space ($/sf)

We note that the attractiveness of Third Avenue space relative to other availabilities in the Grand Central neighborhood is a Class B/C phenomenon; as shown in Chart 7, the gap between Class A rents in the Third Avenue corridor and corresponding Class A rents in the Grand Central submarket has actually narrowed over the last several quarters.

Chart 7.
Asking Rents on Class A Office Space ($/sf)

Asking Rents on Class A Office Space ($/sf)

We show several Class B/C buildings in the Third Avenue Corridor with ample available space (Table 3) and suggest that building age, proximity to transit, and asking rents make Class B/C space along Third Avenue a relative value opportunity that tenants should actively consider, particularly if new construction is not a requirement. Class B/C space along Third Avenue is significantly “newer” than the balance of space built in the Grand Central sub-market with lower asking rents. We caveat our recommendation by noting that more than 376,000 sf of Class A space will be coming to market with Jones Day’s move from 221 East 41st Street to Downtown; however, such significant supply could make Class B/C opportunities even more attractive depending on the demand and pricing for such a large parcel of space.

Table 3.
Select Contiguous and Total Blocks Available, Third Avenue, Class B/C

Select Contiguous and Total Blocks Available, Third Avenue, Class B/C

Table 4.
Age and Asking Rent of Select Class B/C Submarkets Blocks Available, Third Avenue

Age and Asking Rent of Select Class B/C Submarkets Blocks Available, Third Avenue