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In leasing market, worst is over in Midtown.

New York City's office leasing activity has weathered a great deal over the past several years. Now that the worst is over in the Midtown marketplace, industry players who have endured the hardship, have also learned to cope with the changing market dynamics. As a result, this new market cycle has transformed the traditional lease into a highly specialized and individualized agreement, echoing many financial concerns of both the tenant and landlord. Flexible and creative lease terms, such as exit clauses, non-disturbance clauses with current and future mortgagees and escalations with caps, are requisite to the viability and success of today's transactions. Meanwhile, more than ever before, tenants are asserting authority at the negotiating table and achieving some of the best deals in the marketplace.

Overall, midtown Manhattan's office leasing activity enjoyed a steady upswing with approximately 9.9 million square feet of space leased to date. This positive surge in activity has contributed to the market's declining vacancy rate, which currently stands at 16.5 percent, down from 18.3 percent as reported in January of 1993. Furthermore, Midtown's space availability has declined from 45.7 million square feet in January, to its current standing at 43.8 million square feet of space.

Contiguous blocks of Class A space, 100,000 square feet and above, are rapidly diminishing in the Midtown market, leaving only a handful of opportunities for the remainder of the year. Recent major space takers include Patterson Belknap Webb & Tyler's transaction for 117,000 square feet at 1133 Avenue of the Americas, and MasterCard's move into 350,000 square feet of space at 1345 Avenue of the Americas. Owners of premier properties able to accommodate significant space requirements are taking this opportunity to tighten-up on aggressive concession packages.

However, the abundance of quality sublease space and Class B product in the marketplace will prevent any steep increases in rentals. Rates over the next two years are expected to remain within 3 percent of current prices, which average $40.70 for new space and $26.01 for old product. Class B owners will continue to be aggressive on base rentals, with concession packages varying depending upon the financial stability of the tenant.

Additionally, more than 1 million square feet of premier space is expected to deluge the marketplace starting as early as year-end 1993. Chemical Bank' smuch-anticipated relinquishment of approximately 900,000 square feet of space at 277 Park Avenue is expected to come on-line by the third quarter of 1994. The renovation of the Mutual of America Life Insurance building at 320 Park Avenue is expected to be completed by mid-1995 bringing a total of 400,000 square feet on line, while a number of lease turn-overs expected at Rockefeller Plaza over the next three years will further contribute to the widespread availabilities.

Yet, there is evidence of moderate demand for space by small-to-mid-Size tenants, ranging from 10,000 to 50,000 square feet, who represented the bulk of activity to date, which consisted primarily of renewals and subleasing transactions. This spate of activity is expected to continue with a modest increase in the number of expansion-driven requirements. Law firms will continue to actively lease quality space, particularly along the Sixth Avenue Corridor, where numerous opportunities for space takers seeking 30,000 to 75,000 square feet of office space are available. This submarket will become-the main focus of activity over the next eight to 12 months, specifically between 42nd Street and 56th Street along the Avenue of the Americas, where a number of quality space opportunities exist.

Insurance companies, such as Aetna, Prudential, and Teacher's Insurance are becoming increasingly active in the ownership of many Class B and C properties as a result of foreclosure action by financially-strapped owners. As the mortgagee for a number of such building, these insurance firms are striving to revitalize the marketplace by encouraging many of their own divisions and branch operations, who are actively seeking new space alternatives in the marketplace, to act on these opportunities.

The Downtown marketplace began the year on a turbulent note, yet was rewarded by several leasing commitments from a number of large financial companies. The lower Manhattan marketplace quickly rebounded from the World Trade Center explosion, with support by the Port Authority of New York and New Jersey's swift resurrection of the structure's first-class operations. Furthermore, the announcement of BankAmerica's lease for 300,000 square feet at One World Trade Center, and Prudential's move to approximately 850,000 square feet at New York Plaza, reinforced lower Manhattan's viability as the leading financial center.

To date, a total of approximately 1.4 million square feet of office space was leased in the Downtown marketplace. Although activity in this market remains sluggish, there is evidence of consistent demand by the small-to-mid-sized tenant seeking to cash in on the availability of favorable lease terms. A 10-year inventory of Class B product exists, while Class A space is expected to be absorbed within 3 to 5 years.

City planning officials and Downtown owners continue discussions on revitalizing the marketplace, including residential build-up. However, with the approaching mayoral election, only time will tell the fate of these plans.
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Copyright 1993, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:Mid-Year Review & Forecast, Section II; Manhattan, New York, New York office leasing market sees improvement in 1993
Author:Jaccom, Mark A.
Publication:Real Estate Weekly
Article Type:Column
Date:Jun 23, 1993
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