market research

May 2011

May 2011 New York Commercial Real Estate Market Report

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Quality office buildings in Midtown and Midtown South are attracting multiple offers. Landlords are taking advantage of this trend and are raising their asking prices on their A and B office buildings.

New York Market Overview

  • Total Manhattan Class A Office vacancies increased from 9.1 % vacant to 9.3 % vacant
  • Total New York City Office vacancy increased from 8.0 % vacant to 8.1 % vacant
The Manhattan office vacancy rate increased in the first quarter of 2011 even as employment in the professional sector rose at the fastest rate since 2000. There were 11,500 new office workers in the first three months of this year. The first-quarter vacancy rate rose even as employment moved up because, large blocks of space being added to the market from tenants who signed relocation deals last year, and because many firms have excess space for their new hires.

New York City office rentals got more expensive in the first quarter of 2011, even as vacancy and absorption rates remained mostly unchanged. . Li & Fung's rental in the Empire State Building, Lazard and Deloitte signing for space in 30 Rockefeller Center and Bloomberg LP's move to 120 Park Avenue. The average asking rent in Manhattan rose to $50.18 per square foot from $48.62 per square foot in Midtown North. Availability rate of 11.7 percent, down 0.1 percent from the fourth quarter of 2010, and just 300,000 square feet of net absorption.

The city's roughly 1 million rent-stabilized tenants are likely to see their largest rent hikes since 2008 when their leases are up. A study by the Rent Guidelines Board, which is scheduled to make a preliminary vote on this year's rent increases, found that landlords' operating costs rose 6.1 percent over the last 12 months largely due to the rising cost of heating fuel. Last year, when the board agreed to raise rents by a modest 2.25 percent for one-year lease renewals and 4.5 percent for two-year renewals, the numbers were based on a 3.4 percent uptick in landlord expenses. Based on the board's latest study, rents for one-year leases will need to be raised by 3.25 percent and two-year leases by 6.5 percent.

HFZ Group principal Ziel Feldman's presentation of a final rescue plan at One Madison Park is expected soon. Sources say the court approved another extension by the debtors, which would move the official disclosure of the plan to mid-May and possibly into June. Feldman, who has been working for months behind the scenes to help move the project through bankruptcy, submitted a winning bid that would pay about $165 million to get the project out of bankruptcy court and would need at least $40 million to complete construction of the luxury tower, located at 23 East 22nd Street in the Flatiron area.

Mall of America developer Triple Five has reached a deal with lenders and New Jersey Gov. Chris Christie's administration to reboot and expand the stalled Xanadu complex in the Meadowlands,. The checkered, 2.4 million-square-foot complex, originally envisioned as a retail and entertainment destination that would rejuvenate East Rutherford, has sat incomplete along the New Jersey Turnpike for years, sapping up $1.9 billion in the process and developing a reputation as the poster child for failed boom-time real estate projects.

Real estate investment firms Savanna and Monday Properties are launching a $30 million capital improvement for a 20-story, 260,000-square-foot commercial building on Park Avenue South. The owners' plan for 386 Park Avenue near 27th Street includes renovations for the building's lobby, windows, elevators, restrooms and heating and cooling systems.

Edison Properties has made it known why it was leading the city's drive to land a new zoning designation for the old Fur District just south of Penn Station. The developer plans to build a 407-unit residential tower at 249 West 28th Street. City Planning Commissioner Amanda Burden wants to create a new designation and apply it to the area to encourage growth and development around the neighborhood's Class B and C office space.

Professors Karl Case and Robert Shiller, discussed the results of the most recent index, which showed a 3.3 percent decline in housing prices in February. Case said the U.S. housing market has already experienced a so-called "double-dip," as housing prices plummeted from their 2006 highs, then rebounded briefly due to the homebuyer's tax credit, and now the market has returned to previous lows. Case cited an "incredible decline" in households -- "we're not building any new houses, and yet vacancy rates are still going up," he said -- as a major area for concern. Meanwhile, Shiller said the 8.8 percent unemployment rate and the difficulties associated with getting financing are plaguing the market.

Columbia University has scaled back plans for a new public school that it had promised to build as part of its new Manhattanville campus, inciting the ire of a community already on edge about the invasion of the university's construction crews. Teachers College Elementary had been slated to open in the fall as a pre-kindergarten-through-eighth grade school, but Columbia officials said last week that they have not been able to find a large enough space to house it, and will consequently only be able to accommodate kindergarten through fifth grade. What's more, the first year of the school's existence will be tried out across town in East Harlem, rather than the neighborhood it was actually intended to serve.

Red Apple Real Estate submitted a new proposal for developing 500,000 square feet of mixed-use space at the west end of the Coney Island boardwalk, according to the Architect's Newspaper. The plan, which was slated to go before Community Board 13 today, calls for three residential towers ranging from 14 to 22 stories with a total of 400 market-rate condos above 25,000 square feet of retail and 400 parking spaces. Red Apple, led by John Catsimatidis of Gristedes supermarket fame, commissioned Dattner Architects as the lead designer for the project -- but not before the city agrees to rezone the western edge of the boardwalk for the second time since 2005.

Retail prices were flat over the past year along the Upper Fifth Avenue corridor from 49th to 60th streets, but jumped sharply along the stretch of Fifth Avenue between 42nd and 49th streets. Asking rents were $2,067 per square foot on Upper Fifth Avenue in the first quarter this year, barely up from the asking rent of $2,033 per square foot in the same period one year ago. In contrast, the stretch on Lower Fifth Avenue had the increase over the past year, rising by 30 percent to $595 per square foot in the first quarter from $458 per square foot in first-quarter 2010. It was the highest price for the district since the first quarter of 2009, when it was $596 per foot.

Vornado Realty Trust is quietly shopping around a small ground-floor space occupied by luxury skin care company Elizabeth Arden's Red Door Spa at 691 Fifth Avenue, where the company has been located for more than 70 years. New Jersey-based Vornado, which has owned the landmarked structure known as the Elizabeth Arden Building since 1998, is asking $3,000 per square foot for the 1,402-square-foot ground-floor location next to clothing retailer Zara.

During the depths of the financial crisis, developers reconsidered and re-imagined their shelved projects, and now, construction is resuming on some of the city's most anticipated towers. Brookfield Office Properties spent construction delays re-engineering a cheaper way to build a deck overlooking the rail yards as it prepares several towers for its 5.4-million-square-foot lot between Ninth and Dyer avenues and West 33rd and 31st streets. Pacolet Milliken Enterprises demolished an entire block along Sixth Avenue between 39th and 40th streets before the downturn, and has now completed the design for a 350,000-square-foot office building at the site.

The final price of the World Trade Center transportation hub, set to house a new PATH station and connect New Jersey commuters to 13 subway lines, is expected to rise to $3.8 billion, $400 million more than last estimated in February of this year. The Bergen Record obtained Federal Transit Administration documents that indicated the current budget would not be adequate for the Santiago Calatrava-designed building meant to replicate a bird in flight. The agency, which is paying for a majority of the hub, also pushed back the expected completion date three months to March 2015. But the Port Authority of New York & New Jersey, which is in charge of the project, said it remained confident that the $3.4 billion budget would suffice, though that's still substantially larger than the $2.2 billion initially budgeted for the project in 2005.

The New York State Department of Labor has released New York City's preliminary employment data for March and the numbers are promising in the construction and retail sectors. The retail industry added 3,600 jobs, perhaps thanks to Daffy's plan for expansion in the city, but also a reflection of a surge of optimism in the sector. Construction added 1,500 new jobs following two months of heavy losses but is still down 1,400 positions for the quarter. In total, New York City created 5,500 new jobs in March, a similar number to February's statistics which were revised upwards from their previously estimated 2,200 positions.

The city's Landmarks Preservation Commission may providea historic designation on nearly 300 tenement buildings and rowhouses in the East Village. The blocks under consideration are bounded by East 2nd and East 7th streets, between First Avenue and the Bowery, plus 10th Street on the northern edge of Tompkins Square Park. Many of the buildings there are 19th-century residences or institutional buildings that had played significant roles in the lives of immigrants during that time period.

The Federal Deposit Insurance Corp. has made its first foray into the commercial mortgage-backed securities market, by selling off about $400 million worth of commercial loans divided into bonds. LNR Property scooped up the riskiest layers of the bonds, originally collected from 13 failed banks. Traditionally the FDIC sold loans mostly in the form of distressed mortgages but with increasing demands for CMBS the agency wants to get into the act.

The state has halted construction on a planned, $23 million hotel for judges in Albany after budget cuts and controversy. The project, which would have built apartments for the seven justices of the state's Court of Appeals and new offices for the Law Reporting Bureau, is suspended at least through the end of the fiscal year, in March 2012, because "in the context of the times, it did not look like the best thing to be doing," according to a spokesperson for the court, which is only in session for 66 days per year.

Steven Pozycki's SJP Properties said it will develop the $190 million new North American headquarters for Panasonic in downtown Newark by 2013, under a joint venture with Matrix Development Group. Panasonic agreed to relocate 1,000 employees from its current Secaucus, N.J. headquarters to One Riverfront Center, located steps from Newark Penn Station and the city's Gateway Center business complex. The electronics giant, which considered Brooklyn and several other locations across the country as alternative sites, was lured by more than $102.4 million in Urban Transit Hub Tax Credits and other incentives designed to locate businesses near major public transit hubs.

Officials from the city's Economic Development Corp. met with the leaders of several Chinese firms yesterday for a Midtown Manhattan real estate office tour that included One Bryant Park and the Empire State Building, part of a larger, recent effort to attract foreign tenants to New York. The city is focusing on companies it sees as having big potential for growth. It has already courted a group of technology start-ups from London, and has plans to host businesses from Singapore and India in the coming months.

The major health care systems are expanding throughout New York City and beyond. The big news this month was the bankruptcy court's approval of the $260 million sale of the Saint Vincent Catholic Medical Center in Manhattan to the Rudin family and North Shore-LIJ. They plan to develop the first stand-alone 24-hour emergency and ambulatory surgical facility in the New York metropolitan area. North Shore-LIJ plans to invest $110 million to renovate and redevelop the O'Toole building between 12th and 13th streets on Seventh Avenue into North Shore-LIJ Center for Comprehensive Care.

Vornado Realty Trust bought out its partners, the California Public Employees Retirement System, Magic Johnson and MacFarlane Partners at the stalled Harlem development site at 1800 Park Avenue near 124th Street. . Vornado has not made public its plans for the site, but it renewed building permits for a 23-story garage, retail and office property. The firm had tried to develop 1800 Park in 2007 but couldn't get enough commitments from anchor tenants. Meanwhile, in his annual letter to investors, Chairman Steven Roth said developer Mel Blum is rejoining the firm and that Vornado intends to pursue projects at 15 Penn Plaza and 220 Central Park South, currently owned by Extell Development.

New York state ruled that Washington Square Village is eligible for inclusion in the National Register of Historic Places, but New York University insists that won't affect its expansion plans. NYU plans to build two new boomerang-shaped buildings on the campus superblock north of Bleecker Street, a staggered, zipper-shaped building on the block south of Bleecker Street and a 14-story building atop the Morton Williams supermarket currently in the area. The historic place designation means that federal and state funding can't be used to demolish or build structures on the location.

A Forest City Ratner executive offered new details about the Barclays Center basketball arena planned for the Atlantic Yards development site. Bob Sanna, the firm's executive vice president of construction, said the arena will be limited to 675,000 square feet -- too small to house a hockey team, as many basketball arenas do. The arena will hold 18,000 people and sit 25 feet below grade, meaning the high-priced ticket-holders won't walk up stairs to their seats.

Gates at the Port Authority Bus Terminal are getting so crowded that after dropping off passengers, many NJ Transit buses return empty to New Jersey to park for the day, causing unnecessary congestion and higher costs. Each day, about 6,000 buses carry nearly 225,000 passengers back and forth from New York to New Jersey and the current facility isn't vast enough to allow for smooth operation of the buses. That's one reason the Port Authority is eager to strike a deal with Vornado Realty Trust, which has held on-again-off-again talks for much of the last decade to build a tower above the bus terminal that would yield $250 million to add gates and improve operations.

New York City-based institutional real estate private equity firm Savanna Investment Management closed its second real estate fund with $550 million in commitments across six transactions totaling 2.2 million square feet. Real Estate Fund II included an all-cash purchase of the 330,000-square-foot tower at 5 Hanover Square where Savanna got a $47 million loan to recapitalize the 25-story office building. Also included in the fund were purchases at 386 Park Avenue South, 104 West 40th Street and 1375 Broadway, which it bought for just $263 per square foot, the senior mezzanine loan at 100 Wall Street, and the senior mortgage on the Kent Swig-owned 80 Broad Street.

A state Supreme Court judge last week approved a foreclosure judgment against the MAve Hotel, a boutique property in the Flatiron District that was developed by Roxy Deli owner Joseph Ben Moha and Livorno Properties principal Ben Zion Suky. The defaulted mezzanine debt is scheduled for auction May 17 at 60 Centre Street. The collateral is being marketed through the New York office of London-based Savills plc,. Providence, R.I.-based Textron Financial., The developers sought a $30 million loan to buy and renovate the former Madison Hotel, which they acquired for $32 million in 2008, into a modern 70-room hotel.

Chelsea's Limelight Marketplace -- the church-turned-nightclub-turned-retail mall on Sixth Avenue and 20th Street -- debuted to much fanfare less than a year ago but has already begun to shed tenants. Foot traffic has plummeted since the initial hype surrounding the property's $15 million conversion, and now there are grumblings of poor management amongst the vendors that remain. Tenants at the 30,000-square-foot venue are mostly small businesses for whom this is their first retail location. Alongside them were more established brands, like LeSportsac and Hunter Boots, both of which have since ditched their spots there. Grimaldi's, the popular Brooklyn-based pizzeria, didn't open at the Limelight until February, by which time things had already started to go downhill.

Kent Swig's stalled condominium conversion project at 25 Broad Street is back in action as a rental building. A court-appointed receiver has tapped developer LCOR to put the 20-story building back on the market . The project offers 305 one- and two-bedroom units, with 35 different floor plans and rents starting at $3,133 and $5,205 per month. There are also hefty concessions: one month's free rent, plus the elimination of broker fees for renters who sign on for one or two years.

CIM Group has filed an application with the Department of Buildings to begin below-ground work at the site of the former Drake Hotel on Park Avenue and 56th Street, signaling the beginnings of the building process at the long-stalled project. It's still unclear what will rise from the site originally assembled by developer Harry Macklowe, who bought the Drake for $418 million in 2006 and demolished it. He defaulted on the debt the following year, and in 2010, Los Angeles-based CIM bought his $510 million construction loan and took over the project, agreeing to keep Macklowe involved. CIM's application currently calls for a five-story development but those plans could easily change.

Hotelier Sam Chang has unloaded the Holiday Inn Express at 126 Water Street in Lower Manhattan for $36.7 million. The buyer was a subsidiary of Hersha Hospitality, for which this will be the 15th hotel in New York City. Chang, who runs the McSam Hotel Group, had purchased the property for $9.5 million in 2005 when it was a two-story retail and restaurant space. The 26-story, 112-room hotel that now stands in its place was completed during the summer of 2010, but by November, the property had been hit with a lis pendens, which marks the beginning of the foreclosure process.

Father and son owners of the Empire State Building, Peter and Tony Malkin, are planning to create a publicly traded company comprised of numerous New York City buildings in their real estate portfolio. At the forefront of the collection of buildings, is the city's most famous tower. Since buying out their partners in the Empire State Building, the Malkins have ratcheted up their efforts, and have opened their wallets, to transform the building from an aging monument with hundreds of small tenants, to a leading destination for major New York City businesses.

U.S. mortgage activity declined by 6.7 percent last week as interest rates continued to inch upward, according to data from the Mortgage Bankers Association through April 8. Both refinancing applications and applications for mortgages to assist with residential purchases declined in volume on a week-over-week basis, by 7.7 percent and 4.7 percent, respectively. Refinancing applications now account for just 60.3 percent of all U.S. mortgage activity, their lowest share since last May. The 30-year fixed-rate mortgage's average contract interest rate, meanwhile, rose to 4.98 percent from 4.93 percent one week ago -- its fourth straight weekly increase.

The state funding entity New York Liberty Development that pulled a $900 million bond offering Monday needs to sell the securities by the end of the year or risk stalling the construction schedule of 4 World Trade Center. Larry Silverstein's Silverstein Properties has enough money to fund the project through the end of the year, but the additional funds are needed to be certain that work proceeds into 2012. "We would need to price those [4 World Trade Center] bonds at least by the end of this year to ensure that construction continues. And we are very optimistic that is going to happen," Ward said.

The new owner of 35 Cooper Square, Arun Bhatia, met with preservation advocates yesterday to hear their concerns about the site's redevelopment. Preservationists want to make sure the 1825 East Village rowhouse will retain its historic integrity. Bhatia bought the building for $8.5 million last year, and filed a demolition application last month. According to DNAinfo, Simeon Bankoff, executive director of the Historic Districts Council, said Bhatia does not currently have a plan for the building and two adjacent lots.

New York City office rents will grow even stronger for the remainder of 2011 and the city will reclaim its number one ranking among the nation's office markets,. Job recovery, which will include 45,000 new office-using positions, combined with just 1.2 million square feet of new construction in New York City (more than half of which stems from Two Gotham Center in Queens) will push rents up at least 5 percent this year.

Mayor Michael Bloomberg joined local officials at the Queens Museum of Art yesterday, at 111th Street and 49th Avenue in Flushing, to kick off a $65 million expansion project. The museum, which was once the site of the United Nations and twice hosted the World's Fair, will grow to 50,000 square feet by 2013. This will double its current size, and make room for more galleries and events.

Lawmakers and mortgage servicers are criticizing a new plan to keep lenders from rushing homeowners into foreclosure. 14 servicers, including Wells Fargo and JPMorgan Chase, have promised the Office of the Comptroller of the Currency that they will change the way they deal with delinquent borrowers. House Democrats and consumer groups are concerned that these agreements, which could take effect in the next few days, won't have the desired effect. Rep. Elijah Cummings, a Democrat who serves on the House Committee on Oversight and Government Reform, thinks regulators can come up with something better. The Democrats will introduce a new bill in the House today that would demand thorough homeowner evaluations and limits on foreclosure fees.
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