(Bloomberg News) Manhattan developers are planning the city's biggest decade of office construction since the 1980s, betting on rising demand for modern space even with tenants unsigned and the availability of financing more limited.
More than 25 million square feet (2.3 million square meters) of projects are under construction or may be built in the next nine years, according to brokerage Cassidy Turley. Developers including Related Cos. and real estate investment trusts Boston Properties Inc. and Vornado Realty Trust are in talks with potential tenants as they step up plans for towers. Some, including Vornado, may proceed without lease agreements.
Builders and brokers say Manhattan is ready for the boom, citing corporate appetite for the latest in comfort, energy efficiency and technological capability in an area where more than 60 percent of buildings are at least half a century old. The risks for developers are that they are competing for tenants and may have to put up more money as banks are reluctant to fund new projects just three years after the credit crash.
"The developers anticipate improvement in the fundamentals that we haven't seen yet," said Sam Chandan, adjunct professor at the Wharton School of the University of Pennsylvania and chief economist at real estate research firm Real Capital Analytics Inc. "The lenders that could support new construction remain circumspect. It's fair to say that developers will have to work creatively with lenders to line up financing."
Vacancy Rate Improving
The Manhattan office-vacancy rate fell to 12.2 percent as of April 30, after peaking at 13.5 percent in March of last year, according to New York-based Cassidy Turley. That compares with a low of 6.7 percent in September 2007. Class A rents -- rates at the highest-quality buildings that would be most similar to the new towers -- rose for a seventh month in April to $59.65 a square foot. The record was $88.37 in May 2008.
Including buildings completed last year, Manhattan could see about 28.5 million square feet of new office space in this decade. Only 7.4 million square feet was built in the 1990s, and 18.5 million in the 2000s, according to Cassidy Turley. The 1980s had 47.2 million square feet of offices built.
Manhattan's 450 million square feet of offices makes it the biggest U.S. market.
"We're getting to the point where new construction is logical and the developers are ready to come out of the ground," said Robert Sammons, Cassidy Turley's vice president of research. Property companies that stockpiled money during the recession now want to be "ahead of the curve," he said.
Restarting Stalled Project
Boston Properties, the largest U.S. office REIT, may be the first to start building, with construction of a stalled project poised to start in the fourth quarter. The Boston-based company is in the final stages of negotiations with law firm Morrison & Foerster LLP to anchor the planned 1 million-square-foot tower at Eighth Avenue and West 55th Street, said a person with knowledge of the discussions. An agreement may be reached within weeks, said the person, who asked not to be named because the talks are private.