Flight to value leads the market

A fundamental shift is occurring in Manhattan's commercial real estate market and has grown from a whisper to a shout. It has been noted that class A space has been lagging for the past few months. 62% of the available supply is class A. By comparison, in each of the previous two recovery cycles of 2000 and 2007, class A was more competitive, in higher demand, and represented 37% availability. Meanwhile, current class B space accounts for 32% of the prevailing supply. Referring to the other two referenced cycles, class B availability was higher with a significant 10% increase and accounted for 42% in 2000; it was more excessive in 2007 with 46%. Tenants were understandably swarming in droves to class A space at a time when the recovery was led by established, seasoned financial services firms looking to lock down their sought-after, coveted midtown offices. However, there is an interesting change taking place in the requirements for modern space, with the charge led by the professional and business services sector, including technology firm behemoths. As the data and information-based industries grow, many of these younger, fashionable firms are leasing class B space, with a focus on the midtown south sub-markets and a flight to value. Assessing the increases in asking rents over time supports this as a legitimate trend. In 2007, class A midtown was forcefully driving recovery with asking rental rates up 81% from the unfortunate market circumstances of 2003. In today's recovery, there is no question as to what is driving the demand: class B midtown south. With asking rents up 46% since 2010, it remains evident. One final note, this is twice the amount of midtown class A's rental increases during this same time period of only 23%. Richard Persichetti is vice president, research, marketing, and consulting of Cassidy Turley, New York, N.Y.