West side sub-market: future hub of midtown activity.

(The following article, which appeared in our April 20th Commercial Sales and Leasing Supplement, is being reprinted in its entirety. Due to an editorial oversight, the article was not attributed to the author.)

Over the past twelve months, the sustained period of economic growth has fueled leasing activity in Midtown Manhattan, particularly among users requiring 50,000 square feet of space or more. Many of these tenants are actively looking to capitalize on the closing window of opportunity to obtain favorable lease economics, as the generous terms negotiated just one year ago are increasingly difficult to secure.

Overall, this heightened level of activity, combined with a lack of new construction, has served to reduce the supply of contiguous blocks of Class A space. Presently, there are roughly a dozen space options for a large tenant requiring 200,000 square feet of contiguous space, and only two contiguous blocks of 500,000 square feet available in the Midtown market.

The combination of increased leasing activity and subsequent reduction in the supply of quality blocks of space has placed added pressure on the marketplace, and has provoked a sense of urgency among large tenants to quickly consummate transactions. As a result of these factors, a new real estate cycle is on the horizon. One aspect of this turning point is the potential for the West Side submarket to become Midtown's hub of office leasing and development. Already, there is evidence of Midtown's boundaries shifting to the west, with a recently transplanted law firm tenant base along Barrister Boulevard, the industry-coined name for the Avenue of the Americas.

Since 1991, available space in Midtown's Westside has decreased from 19.8 million square feet to a current total of 15.5 million square feet; while the vacancy rate has plummeted from 18.4 percent to a current 12.6 percent. On average, more economical lease terms are attainable within the West Side parameters than the East Side, while its inventory consists of either newer or renovated product.

Additionally, the West Side's more expansive geography is an attractive alternative to the traditional canyon effect created by the East Side's density.

Corporations including News America, MasterCard, Morgan Stanley and Newsweek, have recently committed to the West Side, joining the ranks of Cravath Swaine & Moore, Proskauer, Rose, Goetz and Mendelsohn, Lord Day Lord and Viacom in representing the West Side's viability as a leading office center.

A number of tenants active in the West Side marketplace represent industries which have previously right-sized operations, or are involved in merger activity, and are now primed for growth in the prevailing economic climate. Industries such as defense, health care, financial services, media and telecommunications, are all expanding their operations to compete in today's globally competitive business environment. The latter three industries represent a significant portion of Midtown's actively expanding tenant base.

Since the recent regulatory and technological changes in the telecommunications industry, communications. entertainment and computing industries have forged strategic alliances in an effort to compete for a piece of the information super-highway business. Leading the herd of anticipated technology-driven merger and acquisition activity is Viacom, which recently announced an expansion of 221,000 square feet of space at One Astor Center, 1515 Broadway. This transaction brings Viacom's occupancy to approximately one million square feet of space in Midtown West. There will be a continuation of these strategically-motivated mergers, translating into expansions by a number of related businesses in the Midtown marketplace. Furthermore, several media conglomerates also are securing additional office space for present and future needs.

Morgan Stanley's purchase of two Westside buildings, 750 Seventh Avenue and 1585 Broadway, a combined total of approximately 1.8 million square feet, is a tremendous endorsement for the Times Square business district, and is indicative of the recent economically-driven opportunities to acquire office space. However, given the current market conditions, there are fewer options for other large tenants to conduct similar transactions. Meanwhile, the commitments by Morgan Stanley as well as MasterCard's relocation to 350,000 square feet at 1345 Avenue of the America's is likely to influence the financial services industry and a conceivable flight from Wall Street to the West Side in the near future.

Overall, as the demand for office space continues to intensify throughout the year, the absence of new construction will become more relevant, particularly among major space users who are expanding their operations.

The West Side marketplace, encompassing 30th Street to 57th Street, west of Fifth Avenue, represents the only Midtown submarket with major development opportunities. Historically, the rezoning of Midtown's West Side in 1981 created a dramatic surge in development activity; previously the West Side was rarely considered a desirable office location. Furthermore, the Times Square redevelopment plan is making great strides in finalizing its prospective development activity after nearly twelve years of red tape.

While new construction is merely a vision and not yet a working drawing, smart developers, attentive to changing market conditions, are taking this opportunity to pursue site assemblages in the West Side submarket. With only one development alternative remaining on the East Side, 383 Madison Avenue, the West Side holds the majority of potential development sites. Several recognizable possibilities, totaling approximately six million square feet, include Columbus Center, Rockefeller Center West (745-59 Seventh Avenue) and Times Square. There are numerous opportunities farther west, which may become approachable over the next ten years.

As the supply and demand equation places increased pressure on large tenants to act on the existing market opportunities, there is the possibility that Midtown West may finally fulfill the vision, originated in the early 1980s, to become a significant corporate hub in the 21st Century.