New opportunities in the new millennium - Brief Article

One of the healthiest economies in recent memory is certain to add impetus to Class B investment opportunities in New York City as we begin a new millennium.

That's hardly a Surprise considering that well-located, older office buildings have moved steadily to the forefront of Manhattan's real estate market in recent years, offering the largest acquisition opportunities and delivering yields that are significantly higher than any other product class. One major reason for this is that Class B buildings, by their very nature, have significantly lower rents than Class A proper ties.

Statistically, rents in Class B buildings today are about 33 percent to 50 percent less than in Class A buildings. The money tenants can save by renting space in these buildings is a huge incentive. For example, if a 20,000 square-foot tenant saves $13 a square-foot, it can put $260,000 per year or nearly $3 million in 10 years directly into its pockets.

Another huge attribute of Class B Manhattan office space is that it is almost always in highly desirable locations and traditionally provides first class facilities. This attracts high quality tenants like Omnicon, Coca Cola, First Boston, NationsBank and K III Communications, all of whom presently occupy distinctive offices in Class B Manhattan buildings.

But, there's something else driving the Class B occupancy growth in The Big Apple. According to New York City statistics, private sector employment is on die rise. With nearly 200,000 jobs created since 1993, small companies have been the dominant job generators over the past several years. It's those small companies,. with under 100 employees, that target Class B buildings for first class offices, prime locations and tremendous savings.

Statistics indicate that vacancies in the Class B market have declined from over 17 percent in 1992 to about 6.5 percent at the present time. As vacancies continue to decline, rents in Class A properties are expected to spike up even more dramatically. This further drives the market in the direction of Class B buildings, as companies rush to snatch up the rapidly decreasing available space.

Of course, the key question is: "With vacancies going down and rents going up, should we expect a wave of new speculative Class A construction?" The answer is "no," because Manhattan's economy differs vastly. from the rest of the country. With current asking rents of over $70 per square foot common, and the current cost of construction at more than $400 per square foot based upon land costs and building costs in New York City, average rents would have to jump dramatically to justify new construction. Except for pre-leased, single-tenant projects, we do not foresee much new office construction in New York City in the foreseeable future.

COPYRIGHT 2000 Hagedorn Publication
COPYRIGHT 2001 Gale Group