By Rich Persichetti, Vice President, Tri-State Region Research Lead
So far in 2018, starting rents on new leases (including expansions) averaged $81.59 per square foot, an 8.6 percent increase since year-end 2017. Net effective rents are up as well through May with a 7.2 percent increase to $66.37 per square foot from 2017. Despite these increases, concessions offered continues to soar, widening the gap and creating steep discounts for net effective rents.
Average tenant improvement allowances increased 5.3 percent since 2017 to $88.03 per square foot, while free rent periods remained flat at 12 months. This caused the price differential to increase to $15.22 per square foot, an 18.7 percent discount off the starting rent, and up 5.8 percent from the $13.22 per square foot difference in 2017. These trends are fairly consistent throughout the three major submarkets.
Midtown had the lowest increase for average starting rents on new leases, only up 2.7 percent since last year to $84.08 psf, but average net effective rents remained flat due to a steeper increase in concessions. Through May, Midtown net effective rents are up $0.17 per square foot to $67.67, which caused the pricing differential between the two to reach $16.41 per square foot, marking a 19.5 percent difference. This was due to tenant improvement allowances averaging $94.44 per square foot —an 8.0 percent increase from 2017 – while the average free rent period offered dropped slightly from 14 months to 13 months.
Midtown South had the most substantial increase in starting rents in 2018, up 17.4 percent to $91.28 per square foot, while net effective rents jumped 16.6 percent to $75.93 per square foot. The pricing differential between these two rents stayed the most consistent of the three markets, with a 16.8 percent spread—slightly up from 16.2 percent in 2017. Concessions increased as well, as tenant improvement allowances were up 16.6 percent to $75.93 per square foot and the average free rent period offered jumped from nine to 11 months.
Downtown starting and net effective rents are both up this year. Starting rents are up 2.9 percent to $57.97 per square foot, and net effective rents are up 4.6 percent to $47.99 per square foot, respectively. However, a drop in the average work allowance offered this year caused the pricing differential between starting and net effective rents to decline as well. The 17.2 percent discount off starting rents is down compared to an 18.5 percent discount in 2017, as tenant improvement allowances dipped 15.8 percent this year to $67.86 per square foot. This could also be attributed to the drop in activity this year, as new leases are down 20.6 percent compared to one year ago, with only 2.4 million square feet leased in this submarket.