Newmark Knight Grubb Frank’s Paul Ippolito recently spent time touring properties with a technology company on the hunt for Manhattan office space. He showed the company executives Class A office space in Midtown and Downtown — but they weren’t interested.
“They won’t even walk in the lobby,” said Ippolito, an executive vice president at Newmark.
Instead, the tech firm, which is looking for 20,000 to 25,000 square feet, had its eyes set almost exclusively on Midtown South, specifically on Broadway.
It’s no newsflash that Midtown South has a near-cult following among tech companies and other start-ups. At the same time, more-established firms continue to lay down commercial roots in the submarket, often for their digital operations.
This month, The Real Deal looked at the priciest leases by taking rent in the submarket for 2013 and the first half of 2014, to see what exactly the area’s popularity means for building owners — both in terms of dollars and cents and tenants.
The priciest leases for the time period TRD looked at were dominated by tech firms that inked leases in 2014, according to data from commercial firm Colliers International.
Clocking in at No. 1 was a 25,401-square-foot lease signed by asset manager Claren Road at the newly opened 51 Astor Place. Also in the top five were software firm Infor; British newspaper the Daily Mail, which is headquartering its U.S. web branch at 51 Astor; online consumer review website Yelp;, and First Look Media, the new-media startup founded by former Rolling Stone writer Matt Taibbi.
In a telling sign about how Midtown South is continuing to gain steam, the taking rents for these leases were higher than the top five for 2013.
For example, in the first half of 2014, the starting taking rents in Midtown South’s five priciest deals went from $85 a square foot to $110. In 2013, they went from $72 a square foot to $82.
Nonetheless, the priciest leases for both years hewed toward tech.
While the abundance of tech-tied tenants do not surprise brokers, the rental amounts do.
“I’ve been in the business for over 40 years and I don’t think I could have predicted years ago that buildings would be more attractive and rents would be higher in Midtown South than they are on Fifth Avenue and Grand Central,” said Andrew Roos, vice chairman of Colliers.
No jackets and ties
The roster of firms leasing in Midtown South in both years reads like a who’s who of the top tech firms in the U.S.: Twitter, Facebook, Google, Mashable and Yelp, among others.
But that’s not to say that other, more-established companies, particularly those expanding their technology arms, aren’t also planting their flags there. Major League Baseball’s production wing, for instance, signed an eight-year, roughly 19,500-square-foot lease at 75 Ninth Avenue in the middle of last year. The company will pay $73 a square foot for the first four years and $78 for the latter four.
In addition, investment bank Credit Suisse and electronics giant Sony also signed mega leases in the submarket, both at 11 Madison Avenue. They were not included in the ranking because their taking rents were not available. However, data company Costar Group pegged asking rents for Credit Suisse’s space at $70 a square foot, while asking rents for other space in the building has been reported at $92 a square foot.
Meanwhile, the vast majority of the priciest deals in Midtown South were new leases rather than renewals or expansions, further suggesting that despite the age of some of the areas buildings, new tenants are flooding in.
That’s because the area has garnered a reputation for accommodating their informal cultures, brokers explained.
“They want to take their dogs to work,” said Ippolito, who represented Facebook in two deals at 770 Broadway — in 2013 and again when the networking giant expanded earlier this year. “They’re on a very strong growth path and yet they’re still very young companies,” Ippolito added. He declined to discuss Facebook’s deals specifically.
David Falk, tri-state president of Newmark, represented online marketplace 1stdibs in Midtown South’s priciest lease of 2013: A 15-year, 42,232-square-foot deal at 51 Astor Place, which developer Edward J. Minskoff finished in 2013.
The company, which locked in starting rents of $82 a square foot and moved from 156 Fifth Avenue, never considered leaving Midtown South, said Falk, who also represented Google in its two expansions at the Chelsea Market.
The cutting-edge tenants who sign in the area “don’t want to walk into a building where everyone is wearing a suit and a tie,” he said. “They want to walk into a building where everyone is wearing jeans, T-shirts and headphones.”
Silicon Alley, the beginning
Googled moved to Midtown South in 2005, when it leased space at 111 Eighth Avenue, and subsequently purchased that building for $1.9 billion in 2010. Both moves helped cement the submarket’s reputation as a tech hotspot.
That reputation dates back to the mid-1990s, when the first wave of dot-com companies started leasing in Midtown South, and the corridor from roughly Soho to the Flatiron District on Fifth Avenue and Broadway came to be known as Silicon Alley.
But back then, affordability was driving the area’s popularity.
Now, with Google and other brand-name tech firms clustered there, Midtown South has become a first stop, rather than a Plan B for these firms — even if the rents are gaining on those in Midtown.
In 2014’s second quarter, Colliers data show the average Class A asking rent in Midtown was $76 a square foot, compared with $67.16 in Midtown South — a gap of less than $9. Meanwhile, Class B space, which accounts for the vast majority of Midtown South’s property, was actually more expensive in Midtown South than in Midtown: $57.31 on average, versus $55.05. Average asking rents in Midtown South for Class B space surpassed Midtown’s in the summer of 2013, according to Cassidy Turley.
In addition, Midtown South’s most expensive deals this year were generally inked at rates higher than the asking rents, suggesting that tenants are willing to compete to secure space there.
For example, the starting asking rent at 51 Astor for the space Claren took was in the high $80s per square foot, but the company locked in a starting rent of $110 per square foot, according to Colliers.
And brokers don’t anticipate any downward slide of Midtown South rents, in part because of a dearth of new office construction. Most of Manhattan’s new commercial construction has occurred in Midtown and Downtown, with the exception of 51 Astor and Thor Equities’ 55,000-square-foot 837 Washington Street in the Meatpacking District.
As for tenant mix, they say that the submarket’s tech-heavy makeup will continue for a while.
“They like to cluster,” Falk said. “They like to be in the same part of town.”