Savills Studley Research Savills Studley Insights Re-Thinking Third Avenue We compare the available stock of office space along Third Avenue versus the availability of space within the balance of the Grand Central submarket. We find that leasing activity along the Third Avenue corridor has accelerated, especially among Class B/C buildings. Despite the relatively low level of current availability, we think that Class B/C space along Third Avenue represents one of the last value plays in Manhattan, particularly for clients who wish to be in amenity-rich buildings close to public transportation. With an increase in the amount of higher-priced, new construction set to come online in the Downtown and Midtown submarkets, the relative attractiveness of Third Avenue is apt to grow.
There has been no shortage of media attention broadcasting the increase in Manhattan s office supply. While many of the developers have secured the anchor tenants necessary to kick-start construction, significant supply is still to come. Table 1. Select Manhattan Office Projects and, Q2 2015 Project (Location) Total RBA (msf) Available (msf) Status / Projected Completion / Details Announced Tenants 55 Hudson Yards (11th Ave. between 33rd/34th St.) 1.30 1.22 Delivering early-2018 51 stories; Related, Oxford, Mitsui Boies, Schiller 30 Hudson Yards (500 W. 33rd) 2.39 1.40 Delivering mid-2019 90 stories; Related Time Warner 10 Hudson Yards (501 W. 30th ST.) 1.73 0.26 Delivering late-2015 52 stories; Related Coach, SAP and L Oreal 1 Manhattan West (400 W. 33rd St at 9th Ave.) 2.10 1.55 Delivering mid-2019 67 stories; Brookfield Skadden, Arps West Tower (11th Ave. between 32nd/33rd St.) 2.00 2.00 Related 3 Hudson Boulevard (555 W. 34th St.) 1.87 1.87 66 stories; Moinian 435 10th Avenue + 507 W. 34th ST. + 510-28 W. 35th St. (Former Hudson Spire ) 2.85 2.85 61 stories; Tishman Speyer 438 11th Avenue 0.70 1.70 0.70 1.70 50 Hudson Yards 2.30 2.30 511 W. 35th St. + 451 10th Ave. 0.70 0.80 0.70 0.80 425 Park Avenue 0.67 0.67 1 Vanderbilt 1.60 1.40 3 World Trade Center 2.80 2.28 2 World Trade Center (200 Greenwich St.) Source: Savills Studley, CoStar and company websites. 2.80 Tishman Speyer 62 stories; Related Spitzer Delivering 2018 47 stories; L&L Approved Delivering 2021 63 stories; SL Green Delivering early-2018 80 stories; Silverstein Delivering 2020 80 stories; Silverstein TD Bank Group M 21st Century Fox; News Corp. (tentative) savills-studley.com/research 2
Chart 1. Westside II Submarket Despite conventional wisdom that suggests that an increase in supply, holding demand constant, should bring about a decrease in prices, the increase in availability from new construction across Manhattan is likely to have the opposite effect. Why? Asking prices of new construction can be significantly above prices of comparable, but older space. For example, asking rents for offices under construction at Hudson Yards average $85-$105/sf with prices up to $140/sf for higher-priced floors whereas asking rents on all other Class A space in the West Side II submarket (Chart 1 at left) averaged $84.79 in Q2 2015. Similarly, if one excludes the available space from 1 North End Avenue and One World Trade Center, Class A office rents in the area south of Fulton and Vesey Streets averaged just under $53/sf in Q2 2015 30%-35% below average asking rents on these two newer buildings (Chart 2). As newly-constructed offices arrives on the market, average asking rents in submarkets like Downtown and Midtown West are likely to rise directly as a result of projects such as 1 Vanderbilt, Hudson Yards and 2 World Trade Center, which should make rents in buildings along Third Avenue that much more attractive by comparison. But even if we strip out the new construction effect, we think that Third Avenue buildings offer value on a relative basis. Source: Savills Studley Chart 2. Q2 2015 Asking Rents on Class A Lower Manhattan (Downtown I) Space, $/sf $90 $81.42 $75.00 $60 $52.93 $30 One world trade center Built 2014 1 North end avenue (Former nymex building) built 1997 All other lower manhattan Class A space* Source: Savills Studley and CoStar * Includes direct Class A properties only; excludes sublet space. Area includes Manhattan south of Vesey and Fulton Streets. savills-studley.com/research 3
The Third Avenue Corridor, which we define as Third Avenue from roughly 39th Street to 57th Street (Chart 3 and Appendix I) comprises just over 22 msf. The area s popularity has grown in recent quarters; the amount of available space along Third Avenue has fallen by roughly 50%, in contrast to space in the Grand Central submarket as a whole. Excluding Third Avenue, available space in Grand Central has expanded slightly (Chart 4). Chart 3. Map of Third Avenue Corridor and Grand Central Excluding Third Avenue Submarket Source: Savills Studley Chart 4. Comparison: Third Avenue and Grand Central Excluding Third Avenue Available Space 7,000,000 11,000,000 Third Avenue All Classes, Total Avail SF Grand Central Excluding Third Ave All Classes, Total Avail SF 6,000,000 10,000,000 Q2 '15 Q4 '14 Q2 '14 Q4 '13 Q2 '13 Q4 '12 Q2 '12 Q4 '11 4,000,000 Q2 '11 0 Q4 '10 5,000,000 Q2 '10 1,000,000 Q4 '09 6,000,000 Q2 '09 2,000,000 Q4 '08 7,000,000 Q2 '08 3,000,000 Q4 '07 8,000,000 Q2 '07 4,000,000 Q4 '06 9,000,000 Q2 '06 5,000,000 Source: CoStar savills-studley.com/research 4
A spate of leasing activity over the past several quarters has been responsible for the decrease in Third Avenue availability (Table 2), with available Class B/C space having been trimmed the most (Chart 5). Table 2. Recent Leasing Transactions Along the Third Avenue Corridor Building Building Class Tenant New/Relet/Sublet Lease SF Quarter of Lease Signing 919 Third Avenue A Bloomberg New (15 yrs.) 340,000 Q2 2015 708 Third Avenue B/C Association of National Advertisers Renewal + Expansion 41,000 (23,000 renewal; 18,000 expansion) Q2 2015 666 Third Avenue A Van Eck Global New 53,000 Q1 2015 875 Third Avenue A JPB Foundation New (15 yrs.) 31,000 Q1 2015 909 Third Avenue A Interpublic Group Sublease/ Expansion 112,000 expansion (220,000 occupied) Q1 2015 909 Third Avenue A AlixPartners Sublease (12 yrs.) 65,000 Q1 2015 750 Third Avenue B/C Kaplan Sublease (7 yrs.) 80,000 Q1 2015 205 E 42nd St B/C WeWork New 122,000 Q4 2014 777 Third Avenue A EPIQ Systems, Inc. Sublease (11 yrs.) 49,000 Q4 2014 Source: Savills Studley and CoStar Chart 5. Comparison: Third Avenue Class A and Class B/C Available Space 3,500,000 3,000,000 Third Avenue, Class A, Total Available Space (SF) Third Avenue, Class B/C, Total Available Space (SF) 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 Q2 '06 Q4 '06 Q2 '07 Q4 '07 Q2 '08 Q4 '08 Q2 '09 Q4 '09 Q2 '10 Q4 '10 Q2 '11 Q4 '11 Q2 '12 Q4 '12 Q2 '13 Q4 '13 Q2 '14 Q4 '14 Q2 '15 Source: CoStar savills-studley.com/research 5
Even with the decline in available space, however, Third Avenue asking rents have plateaued over the last several quarters (Chart 6). Whereas Class B/C rents on the Third Avenue corridor have typically been higher than asking rents on comparable grade Grand Central space, the opposite trend has materialized, with asking rents on Third Avenue space currently at a 7% discount to asking rents on Grand Central space. As recently as three years ago, Class B/C rents along Third Avenue asked more than 25% above comparable space in Grand Central. Chart 6. Asking Rents on Class B/C Office Space ($/sf) $80 $70 Third Avenue Corridor, Class B/C, Direct Grand Central Excluding Third Avenue, Class B/C, Direct $60 $50 $40 $30 $20 Source: CoStar Q3 '94 Q2 '95 Q1 '96 Q4 '96 Q3 '97 Q2 '98 Q1 '99 Q4 '99 Q3 '00 Q2 '01 Q1 '02 Q4 '02 Q3 '03 Q2 '04 Q1 '05 Q4 '05 Q3 '06 Q2 '07 Q1 '08 Q4 '08 Q3 '09 Q1 '12 Q2 '10 Q1 '11 Q4 '11 Q3 '12 Q2 '13 Q1 '14 Q4 '14 We note that the attractiveness of Third Avenue space relative to other availabilities in the Grand Central neighborhood is a Class B/C phenomenon; as shown in Chart 7, the gap between Class A rents in the Third Avenue corridor and corresponding Class A rents in the Grand Central submarket has actually narrowed over the last several quarters. Chart 7. Asking Rents on Class A Office Space ($/sf) $110 Third Avenue, Class A, Direct $100 Grand Central Excluding Third Avenue, Class A, Direct $90 $80 $70 $60 $50 $40 $30 Source: CoStar Q3 '94 Q2 '95 Q1 '96 Q4 '96 Q3 '97 Q2 '98 Q1 '99 Q4 '99 Q3 '00 Q2 '01 Q1 '02 Q4 '02 Q3 '03 Q2 '04 Q1 '05 Q4 '05 Q3 '06 Q2 '07 Q1 '08 Q4 '08 Q3 '09 Q1 '12 Q2 '10 Q1 '11 Q4 '11 Q3 '12 Q2 '13 Q1 '14 Q4 '14 savills-studley.com/research 6
We show several Class B/C buildings in the Third Avenue Corridor with ample available space (Table 3) and suggest that building age, proximity to transit, and asking rents make Class B/C space along Third Avenue a relative value opportunity that tenants should actively consider, particularly if new construction is not a requirement. Class B/C space along Third Avenue is significantly newer than the balance of space built in the Grand Central sub-market with lower asking rents. We caveat our recommendation by noting that more than 376,000 sf of Class A space will be coming to market with Jones Day s move from 221 East 41st Street to Downtown; however, such significant supply could make Class B/C opportunities even more attractive depending on the demand and pricing for such a large parcel of space. Table 3. Select Contiguous and Total Blocks Available, Third Avenue, Class B/C Building Address Maximum Available Contiguous Space (SF), August 2015 Total Available Space (SF), August 2015 711 Third Ave. 98,600 266,100 633 Third Ave. 44,800 85,100 880 Third Ave. 36,243 165,000 205 E 42nd St. 30,100 30,100 757 Third Ave. 14,700 63,700 850 Third Ave. 13,700 32,600 Source: Savills Studley and CoStar Table 4. Age and Asking Rent of Select Class B/C Submarkets Blocks Available, Third Avenue Submarket / Type # Buildings Total RBA (msf) Available Space* (msf) (All / Direct) Weighted Average Year Built** Weighted Average Year Renovated** Weighted Average Asking Rent (Direct) Downtown 121 52.2 4.1 / 3.6 1940 1966 $48.59 Midtown South 292 62.0 5.7 / 4.9 1918 1953 $71.23 Midtown 457 120.0 10.7 / 8.5 1935 1961 $61.57 Grand Central, Excluding Third Avenue 114 31.5 2.5 / 2.1 1933 1954 $64.64 Third Avenue Corridor 17 7.6 0.6 / 0.5 1956 1980 $62.90 Source: Savills Studley and CoStar. Based on Savills Studley list of buildings. *Based on space available today or within the next 12 months. All includes space available by sublet. **Averages weighted by building RBA. Heidi Learner Chief Economist hlearner@savills-studley.com 212.326.8648 Lesley Kamnitzer Research Manager lkamnitzer@savills-studley.com 212.326.1621 Savills Studley is the leading commercial real estate services firm specialising in tenant representation. Founded in 1954, the firm pioneered the conflict-free business model of representing only tenants in their commercial real estate transactions. Today, supported by high quality market research and in-depth analysis, Savills Studley provides strategic real estate solutions to organizations across all industries. The firm's comprehensive commercial real estate platform includes brokerage, project management, capital markets, consulting and corporate services. With 27 offices in the U.S. and a heritage of innovation, Savills Studley is well known for tenacious client advocacy and exceptional service. The firm is part of London-headquartered Savills plc, the premier global real estate service provider with over 27,000 professionals and over 600 locations around the world. Source: Savills Studley savills-studley.com/research 7
APPENDIX I: List of Third Avenue Buildings Examined Building Address Building Class Building Address Building Class 222 E 41st Street A 205 E 42nd Street B/C 211 E 43rd Street B/C 140 E 45th Street A 150 E 52nd Street A 150 E 58th Street B/C 600 Third Avenue A 605 Third Avenue A 622 Third AVENUE A 630 Third AVENUE B/C 633 Third AVENUE B/C 655 Third AVENUE B/C 666 Third AVENUE A 675 Third AVENUE A 685 Third AVENUE A 708 Third AVENUE B/C 711 Third AVENUE B/C 730 Third AVENUE B/C 733 Third AVENUE B/C 747 Third AVENUE B/C 750 Third AVENUE B/C 757 Third AVENUE B/C 767 Third AVENUE A 777 Third AVENUE A 780 Third AVENUE A 800 Third AVENUE A 805 Third AVENUE A 825 Third AVENUE A 830 Third AVENUE B/C 845 Third AVENUE B/C 850 Third AVENUE B/C 875 Third AVENUE A 880 Third AVENUE B/C 885 Third AVENUE A 900 Third AVENUE A 909 Third AVENUE A 919 Third AVENUE A 950 Third AVENUE A savills-studley.com/research 8