Rent Compression in Center City


I recently toured spaces in New York City with a client of ours.  We were looking for a higher end space, so the buildings we initially toured represented a good cross section of Class A to A- office spaces in mid town Manhattan.  The range in asking rents went from the high $60s/sf to over $140/sf. That’s a spread of about $75/sf and we didn’t visit buildings with even higher asking rents of $180/sf or more.  Considering the most expensive Class A office rents in Center City Philadelphia are only $35-$40/sf, I found that $75 spread to be remarkable.

Given the broad price range for office buildings in mid town Manhattan, tenants there are forced to make value decisions every day about what kind of space they need for their company and be able to justify the significant cost differential to themselves and their investors or shareholders.  For a 20,000 sf full floor user, this price differential can be $1,500,000 or more annually.  What distinguishes a $65/sf building from a $140/sf building?  Typically, it is the age of the building and the location.  Not surprisingly, buildings with panoramic views of Central Park command significant premiums, as do buildings on the Avenues, as opposed to the numbered streets.  Do the views, location and newness justify these significant cost differentials?  That depends on the business and whether the space is more than just a place to house employees.

A high end hedge fund may justify a significant rent premium because it enables them to attract top talent, impress prospective investors and clients, or the rent is relatively insignificant in the context of their P&L statement.  For other companies, these premiums just can’t be justified.

How does the $75/sf price range compare to Center City Philadelphia? The range in rents among Class A buildings in Center City is only about $10 to $12/sf (excluding the KOIZ buildings and Comcast Tower). That’s not a lot of money separating the 20 year old “Trophy” buildings from the much older building stock.  Why is the range so small as compared to New York and some other cities? Simply put, tenants don’t seem to see much difference in the inherent value of the buildings in Center City and, therefore, no buildings seem to be able to command significant premiums over the more typical buildings stock.

We have very few buildings that command unique views, provide unique amenities, or have a proximity to a desired attraction. Everything is pretty concentrated in a small geographic area. Further, the newer buildings aren’t so new anymore, while some of the older buildings have invested some capital to upgrade their lobbies and building systems, thereby closing the quality gap.  More and more tenants are noticing that clients don’t visit them anymore, so there’s less reason to have space that impresses third parties. As  a result, they are not willing to pay much of a premium when deciding among buildings.

Landlords in the region are frustrated that Class A rents in the City have not risen to “replacement cost” levels which would justify new construction. With only three new office buildings coming on line in Center City in the past 15 plus years, Heaven knows we could use an injection of life into our aging skyline.  However, it is up to the developers to create something more than just a structure which houses workers if tenants are going to pay a significant premium for a new building. They must create a unique experience for businesses and a value-add that isn’t available elsewhere.

In the suburbs and Navy Yard right now, several large companies are building unique corporate campuses and headquarter buildings because the existing office parks and building stock can’t provide them with the experience they want.  These new corporate campuses provide firms with an identity and help foster corporate cultures; benefits that are hard to put a price tag on. Simply put, like the tenants on Central Park South, these companies have made a decision that the intangible benefits justify the higher rents that are associated with these new buildings. If landlords/developers want to command higher rents in Center City, they are going to have to start rethinking the space business. Unfortunately, Central Park isn’t moving to Philadelphia any time soon.

For more information contact Glenn Blumenfeld

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