Big N.Y. Real Estate Deals Belie Idea of a Slowdown

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The New York Sun

A slew of financial services firms have leased large blocks of office space in recent weeks, many for rents approaching $200 a square foot, belying fears of a market slowdown.

Among the largest deals are those of investment firm AllianceBernstein, which has inked a deal to expand by about 151,500 square feet at 1345 Sixth Ave., and National Financial Partners, a network of financial advisers that is moving into a nearly 100,000-square-foot space at 340 Madison Ave. In addition, PricewaterhouseCoopers has a lease pending for 200,000 square feet at 100 Park Ave., according to brokers familiar with the deal.

“Despite what is happening on Wall Street, we are still seeing a good level of momentum,” a broker at Cushman & Wakefield who represented National Financial Partners, Alexander Chudnoff, said.

A smattering of the recent deals have staggering rents, including the Carlyle Group’s 23,400-square-foot expansion at 520 Madison Ave., with rents that start at $180 a foot and eventually rise to $195 a square foot, and Royal Bank of Scotland’s 70,000-square-foot deal at 1095 Sixth Ave. starting at $140 and ramping up to $160 by the end of the 15-year lease.

These leases are important indicators that the financial services industry is growing. The sector accounts for roughly a third of office space leased in Manhattan, and is a key driver of the historically-high rents witnessed over the past several years. Banks and money managers have been taking a beating in the current market, with all the major investment banks — save for Goldman Sachs — reporting earnings losses in the third quarter. In addition, the industry cut more than 10,000 employees in the New York and New Jersey region in August, according to executive employment firm Challenger, Gray & Christmas.

Despite these concerns, real estate fundamentals — demand for space and the limited supply — are strong. As of the second quarter, the vacancy rate for Manhattan’s top tier office towers was 5.4%, the lowest since 2001, according to Cushman & Wakefield Inc., while the average asking rents at these buildings approached $70 a square foot, a record high that is a 38% increase over last year. Employment experts estimate that in order for the vacancy rate to reach 8% — the point at which the balance shifts from a landlord’s market to a tenant’s market — there would need to be 40,000 jobs slashed in the city.

If the market continues to spiral downward and thousands of jobs are lost, it will likely take months for a trickle down to real estate.
“Even if there are layoffs announced, it will take a long time for that to filter into the supply side of the market,” a broker at CRESA Partners, Robert Stella, said.

While experts are watching the market turmoil closely, several financial services firms continue to expand or sign new leases.
PricewaterhouseCoopers, for example, is looking to take the 200,000-square-foot lease at 100 Park Ave. because it needs more space than its headquarters at 300 Madison Ave. allows, according to brokers familiar with the situation. National Financial Partners nearly tripled the size of its office space with the deal at 340 Madison Ave., and has already subleased 35,160 square feet at its Seventh Avenue offices to Keefe, Bruyette & Woods, which is also expanding, for an average rent of more than $88 a square foot. In addition, the AllianceBernstein expansion doesn’t kick in for another three years and runs through 2019, indicating the firm’s expectation that it will need additional room for its growth.

There are several other deals that have also been signed recently, including Peterson Management, which has taken nearly 20,000 square feet at 712 Fifth Ave. at $170 a square foot for the first five years of the lease and $180 a square foot for the remaining five years. At the same Fifth Avenue building, Onex Investment Corp. renewed its lease for the entire 40th floor, or nearly 10,000 square feet, at $150 a square foot for the first five years and $160 a square foot for the remainder of the 10-year lease. Another recent deal is that of Ziff Brothers Investments, which is expanding at 350 Park Ave. by an additional 60,000 square feet with rents that start at $116 a foot and ramp up by the end of the 13-year lease to $134 a square foot.

Still, there is a consensus among brokers that rents will not continue their meteoric rise. “I don’t think you are going to see the annual increase in rents as aggressive as it has been over the past 24 months,” Mr. Stella said. But with such high rents now, even a drop in real estate prices of 10% will leave most landlords in the black.

“Even though the current market turmoil has the potential to slow the Manhattan economy and the real estate market, the market will not be brought to a standstill or suffer serious long-term harm,” a report published by Cushman & Wakefield last week concluded.


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