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The below analysis is an analysis shown on the commercial real estate property: 599 Lexington Avenue, New York, NY 10022
The main characteristics needed to analyze this building would include the location, property type, market rent, quality, owners, and tenants. In addition to knowing these current statistics, it is also important to be forward looking in order to forecast the future state of the property. This building is a higher end office located in the Plaza District within Manhattan, with a monthly market rent of $88.68/SF owned by Boston Properties. Some of its major tenants are well-established companies like Cowen Group and Cornerstone Research, and thus qualify as credit tenants (The Real Deal). While the building was fully completed over 30 years ago in 1986, it is categorized as a Class A office space with an ideal location, easy access to the subway, and stellar amenities. When looking from an investors point of view, this building has promised consistent cash flows from its credit tenants (major corporations) and is inherently attractive due to its prime location and strong fundamentals.
In the broader market of office space in a city, employment rates are crucial in determining the demand for new office space as companies either contract or expand. In the Plaza District specifically, the main demand drivers would be location and recent renovation. We see a lot of the credit tenants value proximity to Central Park, access to premier shopping along Madison and Fifth Avenue, as well as mass transit access to get in and out of work easily. The Plaza District is very convenient for shopping, restaurants, and hotels, and offers direct access to two subway lines. In terms of renovation, over 65% of the space in this submarket was built before, or hasn't had a major renovation, since 1990. This has begun to hurt demand, which we see through many credit tenants moving south in a “flight to quality,” (Costar). Although new construction is extremely capital intensive in this sub-market, building owners must be weary of the tenants’ concerns of outdated facilities and temptations to move elsewhere. While reconstruction may be unrealistically expensive, redevelopment, amenity addictions, and the involvement of new technology into the office buildings may be critical to incentivize tenants to extend their leases and to keep vacancy rates down.
Four major indicators include absorption of new space, quantity of new construction, vacancy rates, and market rents. Absorption is measured in the amount of additional space that is occupied in a given period, and is a demand side indicator. Construction is measured in the number of square footage completed in the period, while also taking into account the properties demolished, in the planning phase, and under construction. This is a supply side indicator. Both vacancy rates and market rents are equilibrium variables. The vacancy rate is the percentage of square footage available in the market that is vacant, relative to total stock. Its formula is previous vacant space new net construction minus net absorption. Market rents represent the price of the space in the market, and is important in determining the cash flows investors expect different properties to generate.
For the Plaza District Office submarket, average market rent is at $88.68/SF and with a 9.6% vacancy rate per the 8/20/18 Costar Report. The specific submarket absorption is currently at 106,861 SF(193,923 SF for 4 and 5 star properties, (70,863) SF for 3 star properties, and (16,199 SF) for 1 and 2 star properties). There is currently 960,505 SF(870,000 SF for 4 and 5 star properties, and 90,505 SF for 3 star properties) under construction and 0 SF of deliveries.
The Plaza District Office submarket has historically been the most expensive submarket in the metro. Per the Costar report, during the height of the last cycle, rents peaked at approximately $90/SF. This has gone down slightly during the recession to around $67/SF but has since steadily grown back. The one deciding factor currently is whether or not companies currently in the Plaza District Office submarket choose to relocate to different submarkets which would negatively impact rent growth. The premier location of the submarket results in newly renovated or redeveloped properties to still have the ability to command some of the highest rents of the Manhattan market. Due to the fact that over 65% of the office space in the Plaza District Office submarket was built or renovated before 1990 many owners have not been able to raise or control rent prices as favorably.
The main opportunities for this submarket lay in its prime location and the attractiveness of being around its current tenants. Many large tenants such as MKP Capital and Bloomberg have recently just resigned or signed for more square footage which could be a sign forecasting a very favorable trend for the Plaza District Office submarket. Some of the challenges of the Plaza District Office submarket are the aging buildings as well as high vacancies. More than 65% of all buildings in the submarket were either built or redeveloped before 1990 making it much more difficult for owners to charge the rents that they would like. Vacancies are also a pain point for the Plaza District Office submarket as absorption is negative and many sizable tenants such as Blackrock signing to relocate to Park Ave as well as other tenants moving to locations such as Far West Side or Downtown. On the flip side, this means that for all of the newly renovated or redeveloped assets in the submarket are still fully able to produce the highest rents in Manhattan and the metro. This means that there is much potential for renovation or redevelopment options to completely change the ability of an owner to command higher rents. This potential represents a very sensible investment opportunity as many newly renovated buildings such as 425 Park Avenue and the 47-floor office building designed by Norman Foster have been able to become very profitable with rents of $175/SF for the top 19 floors of 425 Park Ave and $300/SF for its penthouse floor of the building designed by Norman Foster which is the highest office floor rent in New York history.
Adampincus. “599 Lexington Avenue.” The Real Deal Miami, The Real Deal Miami, 3 Mar. 2017,
“Plaza District Office: New York Market.” CoStar | # 1 Commercial Real Estate Information Company, 20
Aug. 2018, www.costar.com/.
“599 Lexington Avenue.” Wikipedia, Wikimedia Foundation, 28 Aug. 2018, en.wikipedia.org/wiki/599_Lexington_Avenue.