New York CRE – “Manhattan Is Tilting South and West”

“A combination of strong tenant demand in Midtown South, and new development projects on the West Side, is geographically shifting the focus of the Manhattan leasing market to the South and West,” says Citi’s recent review paper on the New York office space market, quoting Vornado Realty Trust (NYSE:VNO) Chairman and CEO Steve Roth.

Time Warner’s landmark deal

Thursday, Time Warner Inc (NYSE:TWX) announced plans to relocate its HQ to a new tower in the Hudson Yards project being constructed by developer Stephen Ross-owned Related Companies in the West Side of Manhattan.

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Said to be the largest real estate project in US history, the Hudson Yards project will comprise 17 towers that will sit on massive concrete platforms straddling a forbidding sprawl of rail yards and parking lots. “This is not how New York should look!” asserts Ross. “We will change that. You’re looking at something that will be far greater than Rockefeller Center — that will be the new heart of New York City.”

Indeed, Time Warner may be looking for Ross to repeat history. The developer transformed Columbus Circle, the site of Time Warner Inc (NYSE:TWX)’s present HQ, and once an unremarkable location off Central Park, into a glitzy, upscale neighbourhood. “Time Warner made a smart move, capturing the value at Columbus Circle and embracing the new technology and efficiency at Hudson Yards,” says Ross.

Strong, accelerating leasing and capital environment

Preparatory to the research note, Citi analysts Michael Bilerman, Joshua Attie and Kevin J Varin held a series of meetings and property views with the management of select real estate companies having a presence in New York commercial real estate. They observed:

  • “Commentary across the board was positive on the New York leasing environment. The traditional financial services sector (i.e. large banks) remains soft, but most other segments of the market are solid.”
  • If the current momentum in lease rates continues, rents could rise all through 2014, though new construction could be an overhang.
  • Strong demand from deep-pocketed investors, such as sovereign wealth funds and foreigners, is keeping cap rates low.

Citi’s picks in the New York CRE sector

Vornado Realty Trust (NYSE:VNO) – Buy- last traded $91.78

Boston Properties, Inc. (NYSE:BXP) – Buy – $104.74

SL Green Realty Corp (NYSE:SLG) – Neutral – $92.99

Brookfield Office Properties Inc (NYSE:BPO) – Neutral – $18.78