— PARK AVENUE OFFICE MARKET SURVEY AND COMMENTARY –

(December 1997)

As the effects of the recession of the early 1990’s on the New York real estate market continue to subside, Park Avenue remains at the forefront of the market’s resurgence. This resurgence has been marked by significant growth in asking rental rates, with the average for the Park Avenue office market corridor now of $38.21 per square foot, while the overall availability rate has remained unchanged over the past year at 8.4%. However, this static availability rate can be somewhat deceiving since two of the three market segments did in fact see a significant drop in availabilities while the third experienced an increase which offset the decrease in the others. It should be noted, too, that this increase is due in part to a large quantity of sublet space being put on the market.

The Park Avenue office market falls within three distinct submarkets.

u Plaza District	-	E.50th to E.62nd and   6th Ave. to the East River
u Grand Central District	-	E.32nd to E.50th and   6th Ave. to the East River
u Midtown South	-	E.14th to E.32nd and   6th Ave. to the East River

The focus of this report continues to be an analysis of trends and activity along Park Avenue in buildings of 50,000 square feet or more.

The portion of the Park Avenue market within the Plaza District continues to tighten, with an availability rate of 7.1%. The total square footage being offered in this market segment fell to just over 463,000 square feet, with slightly more than 190,000 square feet having been absorbed. The resulting availability rate of only 5.0% is nearly half that for the district in its entirety (9.6%). As this segment has tightened, so too has the availability of large blocks of space, with only one building able to accommodate a user requiring more than 100,000 square feet and just over 62,000 square feet in the largest block of contiguous space available. However, it has recently been reported that Lever Brothers plans to vacate a large portion of the 260,000 square feet it occupies at 390 Park Avenue when it consolidates its operations with Cheseborough Ponds and Helene Curtis to form Unilever Home & Personal Care - USA. It is also widely rumored that they will be moving into the Cheseborough facility in Greenwich, Connecticut, which has the necessary space available, but no official announcement has as yet been made.

Not surprisingly with the market tightening, the average asking rental rate saw a corresponding shift in the opposite direction, increasing by more than $5 per square foot, breaking the $50 mark in the Plaza District portion of the Park Avenue market. However, this rental premium has not come without a price tag for landlords, who have found it necessary to further renovate and upgrade facilities in order to justify these rents. In fact, several of the older buildings, including 320, 410 and 460 Park Avenue, have completed renovations in the past few years. Even so, with such a low overall vacancy rate it appears that companies are willing to pay a premium for the prestige which an address in this segment of the market brings despite the advancing age of some of its buildings.

In 1997, the Park Avenue portion of the Grand Central District has witnessed an increase in the quantity of available space as there was negative absorption of just over 264,000 square feet and the availability rate rose to 11.3%. This marked a dichotomy between this and the Plaza District portion of the Avenue which saw positive absorption of more than 190,000 square feet. The continuing trend of corporate economizing as well as some large blocks of sublet space which have come on the market have contributed greatly to this increase. In fact, the largest block of space available on the Avenue is in a building which has no direct space on the market, 237 Park Avenue. More than 366,000 square feet of sublet space, of which 347,000 is contiguous, is being offered here by J. Walter Thompson, the international advertising concern. It is also important to note that two large companies have recently announced plans to move from Park Avenue, Ziff-Davis and Bear Stearns. Ziff-Davis, the integrated media and marketing company, has struck a deal with New York City which will have the company relocate its operations from the 300,000 square feet it currently occupies at 1 Park Avenue to 400,000 square feet at 63 Madison. The deal, which provides Ziff-Davis with approximately $4.3 million in sales tax exemptions, guarantees the company will remain in Manhattan for the next 22 years. In a similar deal with the City, Bear Stearns agreed to a 50 year lease for 850,000 square feet in a built-to-suit office tower to be built at 383 Madison Avenue. Construction is expected to begin as early as next year and occupancy could begin in 2000 or 2001. In return, Bear Stearns will receive approximately $45 million in sales tax exemptions and could earn an additional $30 million in exemptions if it meets job growth requirements. The company will fill the space by relocating its operations from both 245 Park Avenue and 575 Lexington Avenue.

However, despite this increase in available space, the Park Avenue portion of the Grand Central District has seen an increase in the average asking rental rates of a little more than $4 per square foot, rising to $37.62. Landlords in this part of the district seem to be positioning themselves to cash in on the overall strengthening of the New York real estate market and capitalize on the availability of large blocks of space which have become scarce on Park Avenue in recent years. This is evidenced by the number of large deals which were completed within this segment of the Park Avenue market since our report last year, with six leases concluded of more than 100,000 square feet, including two for more than 200,000 square feet.

In 1996, we reported that Park Avenue South, with its "Park Avenue" address and an average asking rent significantly lower than the other two portions of the Park Avenue office market corridor had become one of the most popular parts of all Manhattan. This continues to be the case today, as the availability rate for this part of the Avenue has dropped by a full point, from what was an already tight 5.5%, to only 4.5%. This is less than half of that for the Midtown South submarket as a whole (9.7%). With nearly 59,000 square feet being absorbed since last year, there is now a total of just over 300,000 square feet available along the 18 block stretch. Like the other parts of Park Avenue, as well as the overall New York real estate market, the average asking rental rates have jumped along Park Avenue South, reaching almost $23.50 per square foot. This represents an increase of just under $2.50 or 12% from last year.

Also in 1996, we reported that Morgan Guaranty Trust was set to sign a deal at 345 Park Avenue for more than 231,000 square feet. However, once completed, the deal turned out to be more than 30% larger than previously anticipated, as Morgan leased some 303,401 square feet at 345 Park. Interestingly, aside from this one, the other six large leases signed in the interim were all within the Grand Central District. It’s not unexpected though, given the limited quantity of large blocks of space which were available within the Park Avenue portion of the Plaza District following those large lease signings of a year ago. In fact, there is currently only one building within that part of the Plaza District with more than 100,000 square feet available and there were just two at this time a year ago.

Although there were no large leases signed by financial services companies which were moving to Park Avenue from other locations, there was an overall continuation of the recent trend by these companies to renew and/or expand their presence on the Avenue. Of the major leases concluded for more than 100,000 square feet, four involved major financial services companies. In the largest deal, Furman Selz, the stock and commodities brokers, chose to retain a significant Park Avenue presence when they leased 205,329 square feet in 280 Park Avenue, relocating part of their operations from 230 Park Avenue. The space taken by Furman Selz represents a portion of that which was vacated by Bankers Trust when they sold 280 Park Avenue to Boston Properties and moved much of their operation downtown, taking 273,000 square feet in 4 World Trade Center. Bankers Trust did, however, retain 200,000 square feet as part of the sale/lease-back transaction. Just down the street at 277 Park Avenue, Donaldson, Lufkin & Jenrette expanded, taking an additional 161,150 square feet, and Bear Stearns, in a temporary move, took an additional 100,066 square feet in 245 Park Avenue.

Aside from the financial services firms, there were two other major lease transactions completed which involved more than 100,000 square feet. Philip Morris, the tobacco giant, leased 161,150 square feet at 100 Park Avenue in a combined renewal and expansion. And Xerox Corporation, in the only major deal establishing a new presence to Park Avenue, signed a lease for 120,000 square feet at 245 Park Avenue. The company will be moving employees from both 205 East 42nd Street and 135 East 57th Street to the new location.

Since our 1996 report, two buildings were sold on Park Avenue. 505 Park Avenue, at the northern most end of the Plaza District, was sold for just over $268 per square foot when the Glorious Sun Group, a Hong Kong based real estate investor (the Lui family), paid $47,000,000 for the 175,171 square foot property. Built in 1949, the 22 story building was approximately 92% leased at the time of its sale, with a variety of smaller tenants. The latest sale to occur on the Avenue was that of 280 Park Avenue, the Bankers Trust Building. The building was renovated last year and sold in September of this year for $321 million, or just under $306 per square foot, to Boston Properties. Despite Bankers Trust vacating a significant quantity of space, the leasing effort has gone well and there is just over 133,000 square feet presently available.

In a final note, the ground floors of most Park Avenue buildings have long been home to banks, financial institutions and other ancillary services but there has been little in the way of retail or restaurants along the Avenue. Recently, however, that has begun to change, particularly within the Plaza District portion of the Park Avenue market. Bank consolidations and the limited availability of retail space along the more traditional shopping corridors of 5th and Madison Avenues, together with low office vacancy rates and a high density of office workers on Park Avenue who have very few places to shop or dine have created new openings for retail on Park Avenue. At first it was mostly luxury retailers but recently more moderate priced stores have come to the Avenue, like Borders Books, with a 30,000 square foot superstore on the corner of Park Avenue and 57th Street, and Sym’s, the discount clothiers at Park and 54th. It would seem that the time may be right for retail to become a major part of the Park Avenue landscape.

The major findings of the survey are:

Park Avenue remains at the forefront of the real estate market’s resurgence, with an availability of just 8.4%, versus 11.6% for midtown as a whole, and an average asking rent along the Avenue which has risen over the past year by some $3.68 per square foot to reach $38.21. As the availability of large blocks of space has diminished so too has the quantity and aggregate size of lease transactions for more than 100,000 square feet. Down sharply from the previous year, just six such transactions totaling a little more than 1,000,000 square feet were completed, about half the total square footage of a year ago. Substantial blocks of space continue to be at a premium on Park Avenue as there are still just ten buildings with more than 100,000 square feet available and now only four with contiguous space of this size, down from five a year ago. Park Avenue as a whole experienced modest negative absorption, with an additional 15,000 square feet available from this time a year ago. However, not all parts of the Avenue shared equally, as there was a dichotomy between the Plaza District portion of the Avenue, which had negative absorption of about 264,000 square feet. The Midtown South portion of the Avenue experienced positive absorption of 59,000 square feet. Despite an increase in available space, landlords along the Park Avenue portion of the Grand Central District seem to be positioning themselves to cash in on the overall strengthening of the New York real estate market and capitalize on the availability of large blocks by raising asking rents nearly 11% to an average of $38.21 per square foot.

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