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'Google Effect' Helps Spur Hot Office Real Estate Market

By Amy Zimmer | July 11, 2012 8:32am
Employees of Google walk down a hallway at the internet company's new office space inside historic Chelsea Market June 23, 2008.
Employees of Google walk down a hallway at the internet company's new office space inside historic Chelsea Market June 23, 2008.
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MIDTOWN — Google exerts control over more than just the Internet.

The web giant may get a portion of the credit for boosting the Manhattan real estate market, with a veteran expert citing the web giant's move to Chelsea as the reason for a spike in commercial rents.

Andrew Peretz, executive vice president of Cushman's Midtown South office market, credited Google with boosting commercial values in the area, something he calls the "Google Effect."

Chelsea, along with the Flatiron, Hudson Square and NoHo, which make up "Midtown South" in commercial real estate parlance, was the only area in Manhattan to see average asking commercial rents continue its upward rise from last quarter, according to Cushman & Wakefield data released Tuesday.

"Midtown South is the healthiest market in New York City, in America, and it kind of feels like the healthiest market in the universe," Peretz said.

Midtown South — also known as "Silicon Alley" — has a vacancy rate of 6.1 percent compared to 9 percent in Manhattan overall, according to Cushman & Wakefield data.  The average asking rents in the area increased nearly 11 percent over the past year to $49.43 per square foot.

With more than half of the new leases in the area this year going to information/media services, education and apparel companies, businesses are moving to the area for "cultural" reasons, he said. "It's based on branding, image and the overall soulfulness of the space."

Peretz added, "There's a critical mass of young, good-looking people." They, in turn, attract more "young, good-looking people."

Google may even help kickstart the area's tech sector even more, now that it's leasing 22,000-square-feet (free of charge) at its headquarters to Cornell-Technion's tech campus as the new program readies its digs on Roosevelt Island.

Cushman & Wakefield's experts were optimistic that Manhattan's overall vacancy was poised to drop soon since job growth has been strong — and that would spell a bump in asking rents.

The average asking rent for Manhattan's office space was $58.86 per square foot at the mid-year mark, which was 6 percent higher than the year before.

"New York is one of three cities across the nation that has recovered [since the recession]," said Ken McCarthy, Cushman's senior economist, "and has more jobs than the 2008 peak."

Yet, while office employment of roughly 1.25 million people has surpassed Manhattan's 2008 peak, the vacancy rate remains well above its 2008 lows of 7 percent, McCarthy pointed out.

"Businesses are clearly using space more efficiently," he said and noted that it would take an addition of 40,000 new jobs to bring the vacancy rate back to 6 percent — which is perhaps not a huge feat.

"In the first five months of this year," he said, "New York City added 35,000 jobs. "

Bill Hartman, executive vice president for Cushman's Midtown office market, thought that job growth was within reach.

"If that occurs over the next 12 months, I think we'll see drastic changes in vacancy going down and rents going up."

Manhattan's retail rents have also been strong, especially in areas like upper Fifth Avenue, Madison Avenue and Times Square, according to Cushman's statistics.

Madison Avenue, which was perhaps most effected by the economic slump, saw retail rents dip from a high of more than $1,100 a foot in 2008 to just over $700 a year later as vacancies increased.

Those rents have been on a steady ascent and reached just below $1,100 in the first half of this year as space has been gobbled up by the likes of Rebecca Taylor, Baccarat and Belstaff.

The MAC cosmetic store's lease for Fifth Avenue at 54th Street set a record with its $2,800 a square foot, according to Alan Schmerzler, Cushman's retail market executive director.

"I hope they're planning on selling a lot of lipstick and facial power out of there," he said.