Office upswing very sweet for owners and investors - Supplement: Annual Review and Forecast, section 1

Over the past year, we've seen the office property market in New York City strengthen far more dramatically than even the most optimistic pundits anticipated. And after years of stagnant growth, it's very satisfying to finally see an increase in rental rates.

Since the amount of available space on the market has declined and rental rates are increasing, tenant concession packages have also tightened. In fact, New York City had a 9.4 percent office vacancy rate in the third quarter of 1996 that declined to 6.2 percent in the third quarter of 1997.

Last year, 50,000 new jobs were created in New York City, leading to an unprecedented demand for space. It takes approximately three to five years to develop a building. If each new job requires 200 to 250 square feet of space, that means New York City needs 1 million to 1.5 million square feet of additional office space.

From an investors point of view, the repeal of the Cuomo tax, in combination with current market conditions, has dramatically changed investment values and increased activity here. Nowhere is this more evident than in Times Square, where retail rents have risen exponentially, and we've seen a 30 percent increase in office rents in our building over the past year.

The influx of new retailers and corporate tenants, the introduction of new Broadway theaters, and most importantly, the BID's success in promoting and maintaining the area, have coalesced to make Times Square one of the city's hottest areas for investors.

This was amply illustrated by Jamestown's purchase of One Times Square Plaza at 1475 Broadway for over $100 million. The investment group's willingness to pay approximately $1,000 per square foot for the building is indicative of the high value placed on Times Square assets based on signage income alone. Indeed, as recently as 18 months age, no financial institution would underwrite signage income because of its speculative nature.

Our 1995 purchase of 1500 Broadway out of foreclosure is an illustrative investment success story. With careful repositioning of the property, combined with the swift and dramatic resurgence of the Times Square market, the property has more than tripled in value since we purchased it and taken its rightful place in Times Square.

After instituting a $3.5 million modernization and capital improvement program, Times Square Plaza at 1500 Broadway has an occupancy rate of over 97 percent. As recently as 1996, average rates were $29 per square foot; today, we are achieving average rental rates of over $39 per square foot.

Disney's recent lease of 75,000 square feet of space for an ABC-TV television studio and office space on the building's first four floors has capped the repositioning of the retail component at Times Square Plaza at 1500 Broadway. ABC's plan to turn Times Square into a backdrop for a live, street-side broadcast of"Good Morning America" will make the building a destination for millions of visitors to the area.

For investors, New York remains the world's greatest international city in terms of stability, creativity, culture, diversity, employment growth and the economy. Tourism is at record levels and hotels are seeing the highest occupancy rates in 15 years. Barring a stock market catastrophe or huge layoffs resulting from the trend toward mega mergers, we can expect rental rates to continue to escalate over the next three to four years.

However, the real estate community must realize that there is a natural ceiling on how high rents can go. At this point, New York City is relatively inexpensive on a national and especially on an international level. If rents start to approach the $60 per square foot level, however, companies will look at their rental rates in relation to their fixed operating costs and question their need to be in New York City for such an operating premium. Hence, there is a need for restraint when examining the true elasticity in rental rates for New York City.

COPYRIGHT 1998 Hagedorn Publication
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