Shifts Along Sixth Avenue

Savills Studley Insights
August 25, 2014
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"Sixth Avenue rents seem to have some room to decline relative to rents in other parts of Midtown. In addition, the supply of space that has already been committed to being vacated in the next few years could further impact the Corridor, but time will tell."

Chart 1. Sixth Avenue Corridor Buildings
Map of Sixth Avenue Corridor Buildings

We re-examine a subset of midtown buildings located on and around Sixth Avenue within the Savills Studley Westside I and Westside II submarkets that we designate as the “Sixth Avenue Corridor” (Chart 1 and Chart 2). We show that the amount of space currently available via sublet has dramatically decreased over the past 4-6 quarters, and suggest that the decline in sublet supply, in addition to the increase in direct Class A space relative to lower-quality (and lower-priced) Class B and C space, explains some of the recent increase in average asking rents; the change in the type of space being offered, rather than a broad-based increase in rents generally, has caused an upward shift in average prices. Tenants may benefit from the increase in space within the Corridor as several large office blocks become available over the next few years.

Chart 2. Map of Westside Districts
Map of Westside Districts

The buildings along the Sixth Avenue Corridor account for nearly 45.4 million square feet of office space, or 28% of the combined inventory in the Westside submarkets.1 The significant decline in the amount of available sublet space relative to direct space (Chart 3) has had a meaningful effect on overall asking rents, particularly given the gap in asking prices for direct vs. sublet space. Of the 52 buildings in the Sixth Avenue Corridor, 45 of the buildings are in the Westside I submarket, where we note that direct space commands a 20% premium in asking price versus space offered by sublet (Chart 4).

Chart 3. Direct and Sublet Space Available, Sixth Avenue Corridor
Sixth Avenue Corridor Direct and Sublet Space Available 2005-2014

Chart 4. Direct and Sublet Space Available, Westside In Savills Studley Submarket

In addition to the fact that the percentage of total space available via sublet has fallen dramatically, we note that the level of supply of sublet space has fallen on an outright basis (Table 1). From Q3 2011 to the end of Q2 2014, the ratio of sublet space to total space available dropped from 36% to 19%. While part of this decline reflected the increase in direct space, a portion of the drop was due to the almost 45% reduction in sublet space available on an outright basis. Not surprisingly, the average asking rent on Sixth Avenue space has increased not only because a greater fraction of space is relatively more expensive direct space, but also because of a shift in quality of available direct space: the amount of direct Class B/C space fell by 43%, while the amount of higher-priced Class A space rose by 38%.

Table 1. Available Space By Type and Class:
Sixth Avenue Corridor

While there are many large parcels of contiguous space that remain on the market in the Sixth Avenue Corridor (Table 2), we highlight that sub-landlords are likely not in any rush to reduce asking prices; there are no sublet blocks of space greater than 100,000 square feet available in either the Downtown or Midtown South markets at present. Landlords offering space directly appear to be in no hurry to sign new tenants either. As of August 2014, direct Class A space in the Westside I submarket has been on the market 75% longer than Class A space being offered by sublet (Chart 5). Moreover, currently available relet space in Westside I —whether Class A or all classes—has been on the market longer than available space in any other Midtown submarket (Table 3 ). In an environment where available space is being quickly depleted, the length of time on market for the space that remains may be less relevant. However, as shown in Table 4, with the exception of the Grand Central I submarket, the Westside I submarket—of which the Sixth Avenue Corridor space is primarily composed—has had virtually no change in available space (as measured in square feet) in almost five years. With direct space languishing on the market and a lack of large-block supply in Manhattan’s other sub-markets, the remaining sublet space along Sixth Avenue may look that much more attractive.

Table 2. Major Space Additions (>20,000 sf) in the Sixth Avenue Corridor
Via Sublet Offerings, Last Four Quarters

Chart 5. Weighted Average Time on Market for Westside I Relet and Sublet Available Space, August 2014*

Even with sublet space priced at a discount, however, the shorter duration on a sublet lease often makes the cost of relocation and a build-out prohibitive, particularly without the tenant improvement allowance and free rent that accompanies a direct lease. Moreover, there is some evidence that landlords have been hesitant to reduce base asking rents even for space that has been on the market for an extended period of time. For the 61 Westside I spaces with asking rents that have been on the market for a full year or more, only 7 saw a decline in asking rents over the past 12 months. Reluctance on the part of landlords to lower asking prices makes it that much less likely that sub-landlords will be inclined to lower their asking rents, too.

Even so, there is some evidence that activity is picking up: White & Case announced plans to expand its Manhattan office and will relocate from 300,000 square feet at 1155 Avenue to 440,000 square feet at 1221 Avenue of the Americas in 2017, while Neuberger Berman will occupy 355,000 square feet at 1290 Avenue of the Americas in Q4 2016, leaving behind its Third Avenue space. The space occupied by the IRS at 1133 Avenue of the Americas will be vacated, while the Bank of China is in talks to potentially become the anchor tenant at the 470,000 square foot 7 Bryant Park. Nonetheless, one concern is the amount of direct space that will eventually become available over the next several years along the Sixth Avenue Corridor.

Table 3. Time on Market For Westside I Available Space, By Offering Type and Class as of July 2014, Weighted Average By Square Feet
  • Two significant blocks of space at 1301 Avenue of the Americas may be available upon lease expiry in May 2016: approximately 90,000 square feet on floors 34-36, and another 125,000 square feet on floors 41-45.
    Total: 215,000 square feet

  • Two large blocks of space at 1345 Avenue of the Americas may be available upon lease expiry in Q4 2016: 210,000 square feet on floors 26-30, and 84,000 square feet on floors 46-47.
    Total: 294,000 square feet

  • Time Inc. recently announced a move to Brookfield Place, where it has taken 691,000 square feet for a lease beginning in Q3 2015. Its current lease—approximately 1.9 million square feet at 1271 Avenue of the Americas—expires in December 2017, at which point, building owner Rockefeller Group will likely renovate the building. It will also be vacating another 257,000 square feet at 135 West 50th Street.
    Total: 2,157,000 square feet

  • HBO has offices at 1100 Avenue of the Americas (349,000 square feet) and 1114 Avenue of the Americas (360,000 square feet), with leases that both expire in December 2018. HBO will move with Time Warner to Hudson Yards, and their relocation will create another source of supply in a few years’ time.
    Total: 709,000 square feet

Table 4. Floor Plate Sizes in Select Sample Buildings by Location (in Square Feet)

All else held equal, the possible availability of 215,000 square feet from 1301 Avenue of the Americas and 294,000 square feet from 1345 Avenue of the Americas within the next 7-9 quarters has the potential to bring the availability rate in the Sixth Avenue Corridor from a current level of 12.4% to 13.6%. Because much of this potential space is on the top floors of the respective buildings, average asking rents for the area could be boosted by the relatively higher rents from the buildings’ tower floors, pulling up asking rents for the neighborhood even without a demand-led driver. While further down the timeline, the additional 2.8 million square feet of space added to the market from the relocation of HBO and Time could further lift the availability rate into the high-teens, possibly pressuring landlords further.

Lastly, we note even with upgraded lobbies and new facades, much of the Sixth Avenue Corridor space boasts very large floor plates, which can make for less efficient lay-outs given existing column configurations. As shown in Table 5, many of the newer offices offer floor plates that in some cases are half the size of some of those along the Sixth Avenue Corridor. With loss factors that are typically greater for partial floors than full floors, dividing a large floor plate may be much less cost effective than leasing an entire floor in a building with a smaller footprint—yet another reason we anticipate that rents in the Sixth Avenue Corridor may come under pressure over the medium term, evidenced as a softening in asking rents, or more likely, an increase in tenant improvement allowances and other concessions.

Table 5. Floor Plate Sizes in Select Sample Buildings by Location (in Square Feet)

Xander Walbridge
Research Manager