Thursday, April 5, 2007

Could a Downtown Migration Signal the End of the Midtown Office Craze?

An article in CPN this morning on JP Morgan Chase negotiating with the Port Authority to building a 50-story office adjacent to the World Trade Center site implies that a number of blue chip Midtown tenants are exploring possibles moves to downtown.

"Overall there is significant sticker shock from some big midtown tenants that are looking downtown. Even the best inventory downtown is trading at approximately half of that ($100 per square foot) at $60 plus or minus a square foot." [So says Brian Given, vice chairman at GVA Williams in Manhattan.]

Following up on this story a few days ago, could we be staring at the beginning of the end of the Midtown office craze?

It is well known that very little available office space exists city-wide, let alone in the core Midtown office market from 6th Avenue to Lexington, 42nd Street to Central Park. If the big banks are going to aggressively pursue the types of spaces the recent rumors suggest, one has to believe that new downtown developments will be their only possible solution.

Let's not kid ourselves - when comparing a new Class A+ office at $60 per square foot versus a 30-year old Class A office at $100 per square foot, ahead of what many believe to be a rebirth of Lower Manhattan, the cheaper, value-added play will win out every time.

The flip side of the coin is that Midtown landlords are forced to drop their rents significantly - perhaps by as much as 25% - to keep these core tenants.

In either case, its hard to see the Midtown valuation trend continuing very much longer; it's certainly much easier to see the nearing peak of the price curve.


RiskAdjusted said...

Don't think MT is going anywhere, but up... seems like big guys just planning for less expensive bodies coupled w/ the quest for more trading and few sites to accomodate... only JPMC would be potentially vacating space, and plenty of demand to backfill 277. Otherwise, no way MD Bob or hedge fund Joe and thier counsel Phil are commuting from GCT to downtown. DT rents are just keeping up w/ MT, but doesn't seem like the spread is tightening... But, who would've thought WTC would hold water back in '04, amazing what the mkt has done

Three Capper said...

I'm not sure, to be honest. Obviously, the only large blocks of space in the whole city will be down there. Millions of square feet in brand new buildings.

And not sure about JPMC being the only Midtown loss. What about Wachovia? Credit Suisse? Deutsche's offices at 48th and Park? What about UBS/Dillon Read Capital? They are in what, three different buildings along Avenue of the Americas? They can't consolidate in Midtown.

In any case, like I said, I don't have the answer. It's just a lot easier to see a downtick in Midtown values right now than it is to see the current trend continuing...

PS. Thanks for the comment. I just started writing this like a month ago. I never posted the URL anywhere on the web. People just found it, which is pretty cool. Plus, you're the first person to ever leave a comment.