Cycles & Comparisons : New York City’s Office Building Market Is Healthy, With Far Fewer Vacancies Than in Los Angeles.
Take Century City’s skyline, multiply it 40 times over, and plop it down on a rectangular plot of ground measuring roughly 11 square miles.
That’s Manhattan--Los Angeles-East--the place “that’ll be a great city, if they ever finish it.” And the comparisons and contrasts . . . the love/hate relationship between the two great urban centers that are the financial centers of their respective coasts . . . are inevitable.
The Los Angeles office market, which the nationwide real estate leasing, sales and consulting firm of Julien J. Studley Inc., defines as the 17-mile area between downtown Los Angeles and the ocean on the west, and between Wilshire Boulevard as the axis, out to Ventura Boulevard in the San Fernando Valley, sprawls over about 100 square miles and, in terms of vacancy rates, has had happier days than it is now seeing.
Market-wide, according to Howard D. Sadowsky, senior vice president, vacancies average about 13% to 14%, “but from a low of about 6% to 7% in the Westwood area, to about 15% to 16% downtown, and perhaps as high as 17% in the Los Angeles International Airport area.”
The continually surprising Manhattan office market, with almost twice as much office space as Los Angeles (320 million square feet versus 180 million) crammed into a tenth of the space, has an overall vacancy average of 7 1/2%. But in only one area (the downtown Battery market) does the vacancy rate, 14.7%, approach Los Angeles’s overall average.
Old, established areas, such as Midtown West, with a vacancy rate of 3.1%, and the Plaza District, anchored on the west by the Plaza Hotel and extending to the East River, with a vacancy rate of 4.2%, remain as tightly compacted as a number 11 foot in a size 9 sock.
“Los Angeles, admittedly, has gone through the wringer,” Stephen Siegel, chairman of the board of Cushman & Wakefield, the national full-service real estate firm, told the The Times in a recent interview in the firm’s 6th Avenue office here, “but I’m far more optimistic about it than I am, say, about Houston or Denver.
“Marketplaces like those two are industry-dependent--and, in their cases, sole industries, and their health will have a far slower recovery than Los Angeles will have.
“While the vacancy rate in Los Angeles is high on a percentage basis, it, in terms of square footage, is nowhere near either Houston or Denver. Los Angeles is a broad-based market, largely service-related, and we see Los Angeles back to full health in about three years. With both Denver and Houston, I think we’re looking at five to eight years, minimum.”
Constantly tearing down the old and replacing them with even taller, more modern structures--”I would guess that some of the office buildings you see going up right now are fifth generation buildings on the same site,” Siegel added--New York City’s dynamism seems to baffle even Cushman & Wakefield’s chief executive officer.
“Declining interest rates, inflation staying totally in check in about the 3% range and a steady, healthy, sort of business environment are certainly part of it,” he added.
“But then, we’ve also had landlords here seeing the steady absorption of office space the past couple of years, and they’ve become a little less aggressive in their development. As a result we don’t have the sort of overbuilding that characterized the late ‘70s and early ‘80s.
“We’ve got, roughly, a 7% vacancy, Midtown, and we don’t have an exorbitant amount of space coming on-stream in 1986 that would transcend the natural absorption. Even with a slowing of growth, we wouldn’t expect to see more than a 2% increase in the vacancy rate.”
Construction financing rates in Manhattan are in the 10 5/8% to 11% range “and some builders are optimistically projecting rates under 10% before the year is out,” Siegel said.
“But I guess most of the vitality here is in line with what our own economists tell us--that we’re now in the best times we have ever had, and that the American economy is healthier, as it relates to the rest of the world, than it has ever been.”
It’s the sort of global health that is increasingly attracting foreign money both to Manhattan and to Southern California.
“Japanese investors,” Siegel said, “have historically stuck pretty well to the West Coast, but now, from a high visibility and recognition standpoint, it’s New York. Certainly, for them there’s nothing in between.”
As a nationwide factor in the commercial real estate market, according to Kevin Haggarty, financial services director for Cushman & Wakefield, “about $12 billion came into the country in 1985, and it’s a trend that began in about 1984 with an infusion of about $6 billion to $7 billion, and it really started taking off in 1985. And about one-half of this money is Asian, primarily Japanese. There’s still a panache about New York that’s almost irresistible to foreign investors.”
And, while New York City and Los Angeles are vastly different markets to service for a nationwide real estate firm like Cushman & Wakefield (the firm handles the entire, gigantic Manhattan market out of only two offices, but must have six offices to handle the sprawling Los Angeles market), Haggarty, too, reflects Siegel’s optimism about “New York West.”
“Los Angles, right now,” he added, “is like Philadelphia or Boston--a ‘hot’ city. Investors look at all three of them and say, ‘What a great town! Let’s build something!’ Builders, by their very nature are optimists--’My building is going to do better than the next guy’s.’
“Overbuilding in a city like Los Angeles isn’t necessarily the lack of demand, oddly enough. It basically has to do with economics rather than with absorption as it’s generally understood. You take a look at a city like Houston and you just don’t know what the demand is going to be in a year or two because its whole economy is contracting.
“But, we’re willing to bet on Los Angeles, both because of its financial base and the quality of life out there. It’s one of the key, hub cities like New York, Boston, Chicago and Washington, as far as desirability is concerned.”
“I’m a little surprised to hear that kind of optimism about Los Angeles coming out of New Yorkers,” Studley’s Los Angeles-based senior vice president, Sadowsky said.
“Maybe they finally realize that this is the financial mecca of the West. Or a recognition that a lot of our business has been coming in from New York. Look at the downtown L. A. tenants that have come out of Manhattan fairly recently--financial firms and banks like Citicorp, Chase Manhattan and Manufacturers Hanover.
“We’re actually in pretty good shape here. With a market of about 180 million square feet, and with about 24 million of it vacant, and another 15 million either under construction or recently completed we’re looking, roughly, at about a two-year gap before we’re in balance.
“We absorbed 12 million square feet last year, up from 9 million the year before, and the rate of absorption is increasing all the time. You’ve got to remember, too, that a lot of the square footage here that shows up in the statistics as ‘vacant,’ is either still under construction or brand-new and isn’t really ready for occupancy.”
The bottom line in any commercial real estate market, of course, is the demand/supply ratio, which translates as rent and/or concessions that landlords are willing to extend to woo tenants.
Even in Manhattan, with what Los Angelenos would view as a “bare bones” vacancy factor--averaging 7% Midtown--bargaining is still very much a part of the game.
As Cushman & Wakefield’s Siegel put it: “The landlords who are going to be successful here this year are going to be the sophisticated and aggressive ones--those who, in lease transactions, are willing to offer amenities in pursuing tenants. Those who simply sit back and say, smugly: ‘I’ve got a building, it’s the best and they’ll meet my price or I won’t lease it,’ aren’t going to lease it.”
Admittedly, though, a New York landlord’s definition of lease concessions, and a Los Angeles landlord’s definition of the term, are widely divergent.
“Out here,” Studley’s Sadowsky added, “you’ve got to stretch to make a deal if you’re after a name tenant. It can take the form of a year’s free rent, over-standard improvements--which can amount to a package worth maybe $35 to $40 a square foot--extra parking, or anything else that works. So, when we talk about prices, we’re talking about effective prices.”
And “effective” simply means the asking price per square foot, per year, less the value of the concessions made to the tenant.
“Right now, in downtown Los Angeles, in a new building,” Sadowsky continued, “we’re talking about an effective price that might be as low as $21 a square foot and as high as $27. The best, and cheapest rentals right now are in good, but not necessarily new, offices in the Mid-Wilshire district and around Los Angeles International Airport. This would be an effective rent of about $15 a square foot, maybe a little less than that around the airport.”
The currently “softest” leasing market in Manhattan, according to Cushman & Wakefield, is Midtown South (Canal Street to West 30th Street) where effective rents can be found as low as $15 to $30 a square foot. But the Manhattan office market, generally, is in the $35-to-$40-per-square-foot range, and with the prestigious Plaza district--upper 5th Avenue to the East River--commanding rents that average $43 per square foot.
The role that “name prestige” plays in the New York City market impressively slops over from the office market to the retail market and reaches its zenith with the spectacular Trump Tower on the northeast corner of 5th Avenue and 56th Street. Here, in the five-floor retail portion of the building, The Atrium, effective rents begin at $150 per square foot--and that’s the minimum guarantee against gross receipts.
What kind of retailer can “cut it” at these rents? Not everyone, obviously, and in the first three years after the opening of The Atrium, about 15% to 20% of the original 40 stores in the complex had either moved or closed their doors.
But for the others--just as obviously--it pays. A case in point: the first American outlet for Asprey & Co., the elegant, 200-year-old London dealer in jewelry, crystal, leather goods and antiques.
Beginning with 1,400 square feet, Asprey last year added another 4,600 square feet and has the distinction of paying the highest rent of any retailer on 5th Avenue--$450 per square foot as the minimum guarantee against gross receipts. That’s a cool $2.7 million a year before the first Ming vase has been sold.
By all odds, Studley’s Sadowsky adds, the closest approach that Los Angeles has to 5th Avenue in the prestige-retail market is Beverly Hills’ Rodeo Drive.
“Effective leases on Rodeo Drive,” he continues, “run from about $60 to as high as $100 or $120 a square foot. But, at the upper end of that range--in the $100 to $120 neighborhood--most of the retailers are European companies who have come in fairly recently and most of them aren’t really making it.
“There just isn’t really that much serious foot traffic on Rodeo. They’re there because of the name . . . it’s a loss leader for them. The older ones with long leases at the lower rents are doing very well, of course.”
Whether it’s office space or retail space, both New York and Los Angeles businessmen must have a place “to hang their hat.” And how golden that hat rack is boils down to both geography and local economic factors over which, alas, no individual has any control.
