Why Midtown is Not (Yet) a Full-scale Tenant’s Market

Why Midtown is Not (Yet) a Full-scale Tenant’s Market

Last week I attended a lunch for REBNY’s “Leasing Brokers” committee. It was my first time attending the committee meeting and I found it to be informative and valuable.

The meeting started with an introduction by one of the committee chairs, Bill Montana of Savills Studley, and then everyone went around the room describing what they are seeing in the market. Since this meeting was the first lunch of 2018, it also served as a year-end review with people discussing 2017’s final market numbers and making predictions for how they think 2018 will compare. 

After Bill’s introduction, the first person to speak was a broker who commented that 2017 was “The Year of the Large Deal,” with 33 new leases or expansions of over 100,000 sq. ft. (CBRE published a short report on this that I am happy to share with you; just e-mail [email protected] for a copy.) Despite an extremely healthy 2017 from a leasing perspective, he made the observant distinction that net effective rents are dropping and therefore suggested that we are in a “tenant’s market.”

I do most of my work in Midtown, Manhattan and despite the popular belief that Midtown is in trouble as a result of tenants moving to Hudson Yards and Downtown, in my opinion Midtown is not fully feeling those effects just yet. It’s remarkable how often clients and prospects say to me something along the lines of “It’s a great time to be a tenant” where in actuality I would say that this is a good time to be a tenant, but not yet great. 

So when this comment was made, I was quick to disagree and share my experience over the last six months. On the whole, I am not finding it overly easy to negotiate which, in a full-blown tenant’s market, would be the case. Working with Mike Movshovich and other talented colleagues, it’s extremely important to create a bidding war for our clients’ tenancies. By and large, landlord’s are sticking to their rents. Yes, rents are flat and concessions are higher, but the way to get your client a good deal in this market is still through tough negotiation and a well-developed strategy. You can’t just show up at a building, conduct a half-baked negotiation, and expect a great deal. 

Unsure if a “tenant’s market” vs. a “landlord’s market” was entirely subjective based on people’s opinions or an actual state to classify a market, I reached out to one of the leader’s of CBRE’s research team when I got back to the office that afternoon. Turns out, CBRE does have definitions for each of these conditions. When describing a tenant’s market, our national reporting writes:

Tenant’s Market: where one or more of the following market conditions exist: negative net absorption, flat or increasing vacancy rate, sluggish leasing activity, flat or declining rents, rent concessions or an imbalance created by a large increase in new supply.                           

Based on the above definition, the two conditions met to classify Midtown as a tenant’s market are flat rents and an increase in concessions. Here are 2017’s Midtown stats, which I believe may be a shock to many:

  • Net absorption was positive 1.2M sq. ft. – meaning that despite the hype around Midtown’s exodus, on a net basis 1.2M sq. ft. was taken off the market last year
  • The vacancy rate fall from 11.8% to 11.2%
  • Leasing activity was strong – Midtown’s total was the highest since 2006
  • Rents “fell” but only by $1 and have been essentially steady since 2015 at approximately $80 per square foot
  • Rent concessions increased

While yes, rents are flat and rent concessions are increasing, only when we see some of the other metrics shift in favor of a tenant’s market will Midtown truly reflect what most people think it is already.

I don’t need to look at the stats to know when this shift will happen. As a tenant representation advisor, it’s something I will feel. Looking at the stats just now only reaffirmed my belief that Midtown is not (yet) a full-scale tenant’s market. 

What do you think?