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Overview
The Fashion District is best described as a sub-market of the larger Midtown Manhattan market, which is the largest and most highly valued market in the country. The Fashion District is unique from other parts of Midtown in that its office stock is more heavily weighted to class B/C space rather than class A buildings. The area is also characterized by its tenant mix - with a significant though lessening presence of industrial uses (manufacturing and warehouses) interspersed with the dominant tenant groups of wholesalers and office users. As noted previously, there is very little residential use in the Fashion District, almost all of it is west of Eighth Avenue.
Located just west of what is considered the "midtown core" of class A office space, the Fashion District should be well positioned within the market. It is particularly well served by midtown’s mass transit network, with two regional transit hubs within walking distance - the Port Authority Bus Terminal to the north and Penn Station to south - and stops along 16 New York City subway lines and the New Jersey PATH train system. This transportation makes the area highly accessible to a broad regional labor force as well as allows workers in the district to remain connected to business partners throughout New York City.
The Fashion District's Midtown location and superior transportation access should make the neighborhood a premier midtown sub-market, but the nature of its tenant mix, existing real estate market product and restrictive zoning policies have caused the area to under-perform the rest of the midtown market. During the interviews conducted by the study team, property owners, real estate investors and building managers conveyed their opinion that tenants find the Fashion District to be the "office market of last resort". A recent Wall Street Journal article noted the displeasure of one well-known tenant (a financial service company that relocated from the World Trade Center after September 11) upon taking space in the Fashion District. The tenant cited the noise, congestion and lack of amenities as main complaints. In addition to the incompatibilities of office tenants and warehouse/distribution activity, office tenants complain of the lack of dining and retail amenities as well as feelings of insecurity that results from the limited lighting in the neighborhood. These factors have the effect of holding the Fashion District back from fulfilling its true potential as a thriving midtown sub-market attracting a multitude of industries with growth potential in New York City. The following section discusses this potential and makes the case for why the role of the Fashion District should be reexamined in the context of the larger midtown marketplace and the City’s ambitions for creating new, dynamic centers of commerce and activity in Manhattan.
The Fashion District offers significant economic development potential. The nature of the area’s location in the center of midtown and its competitive office rental prices offer prospective tenants an attractive alternative to other off-price office sub markets, such as Lower Manhattan, New Jersey, and the outer boroughs. The potential for additional office tenancy, as well as complementary residential uses, provides a logical replacement for the manufacturing and warehouse uses that have shown steady decline in demand in the neighborhood over the last 15 years. While these uses are expected to continue to fall off in the years to come, residential demand remains strong and office demand is expected to increase as the City’s economy recovers. The successful development of Times Square and the ongoing development of surrounding areas including the Port Authority Bus Terminal project and the New York Times building on Eighth Avenue will continue to draw attention to the Fashion District as a strategic midtown location. Retail demand also remains steady in New York City, and while creating additional retail opportunities in the Fashion District presents some challenges, it seems probable that the Fashion District could achieve better performance of the existing retail stock - which would create a better environment to attract tenants to the area’s office buildings.
Office Market Trends
Recent and historic patterns indicate that trends for the Fashion District are closely tied to the overall Midtown Manhattan. The Fashion District tracks changes in the broader midtown market, but generally under-performs it in terms of rent. For purposes of statistical analysis, market data collected for the 10018 zip code is considered to provide a reliable indication of the Fashion District.
Office Rental Rates
Chart 5 - Average Class A Asking Rents, 1999 - 2002
Due to the decline in the general economy, the overall midtown office market has declined steadily since the end of 2000. The trends indicate that although 4th quarter 2002 class A rental rates are down from the prior year in both the overall market and the smaller sub market, rates are still well above 1st quarter rents exhibited in prior years. The same trend is also true for class B & C space in the same corresponding markets (as indicated in Chart 6 below). Although the bottom cannot be predicted with great accuracy, it appears that there is some evidence of a stabilizing market in Midtown overall.
Chart 6 - Average Class B/C Asking Rents, 1999-2002
Vacancy and Absorption
A look at recent vacancy and absorption patterns in the Midtown market confirms in many ways what one would expect to find at a time when asking rents are declining; the market experienced increasing vacancy rates and negative space absorption. The vacancy rate for all space in midtown, including direct and sublet space, increased from 6.43 percent to 10.30 percent during the time between year-end 2000 and the end of the third quarter 2002. Vacancy rates for the Fashion District started off at a slightly higher base and increased overall from 7.14 percent at year-end 2000 to 13.57 percent at the end of the third quarter 2002.
However, patterns in the overall Midtown and Fashion District markets diverge when looking at quarterly trends in absorption. The class A net absorption in the Fashion District was a positive 152,000 SF over the past six quarters, while it was a negative 2,946,000 SF for the overall Midtown market. This observation, illustrated in Chart 7, suggests that the lower rental rates offered in class A space in Fashion District area have provided a competitive advantage in attracting cost conscious tenants seeking less expensive space. (The advantage appears to be associated only with class A space. The divergent pattern was not borne out in terms of class B/C space - the Fashion District’s dominant stock – as net absorption among these building types in both markets exhibited negative net absorption in almost every quarter since first quarter 2001.)
Note: 4Q2002 is only complete through mid December, the most recent data available
Prior to September 11, 2001, there was a strong trend within the Fashion District toward conversion of manufacturing space to office. Although that trend appears to have slowed, the relatively strong demand for class A office space within the Fashion District in comparison to other areas of Midtown provides support to the idea that the conversion trend will return along with an overall economic recovery in the area if conversion restrictions are eased or lifted. With manufacturing use expected to continue to decline in the Fashion District as well as in New York City as a whole, office use provides a logical replacement for that lost space due to the District’s central Midtown location, its access to public transportation, and its competitive rent levels. In addition, as the office market grows in the immediate and surrounding areas, it will enhance demand for space within the Fashion District.
Residential Market Trends
As the previous demographic analysis indicated, residential use is quite limited in the area of the Fashion District. However, the area is book-ended by residential activity - with the well-established residential community along the Ninth Avenue corridor to the west and new residential buildings sprouting up to the east near Sixth Avenue. While the current zoning does not allow residential uses within much of the area, there is strong potential for successfully incorporating residential uses into the mix in the Fashion District. And, if the zoning were changed to allow residential uses, it would have the added benefit of injecting new life to the Fashion District, providing spill-over benefits in terms of safety and retail amenities that would support the other uses in the area.
Demand for Residential Property
There have been measurable declines in some segments of the residential market in the last few years, but the outlook for Manhattan residential property remains positive. According to the Corcoran Group, a residential real estate brokerage firm that provides semi-annual market reports for Manhattan, sales prices for ownership housing (including condominiums, cooperatives, lofts, and townhouses) increased in 20 of 32 Manhattan market segments surveyed between year end 2002 and mid 2003. In the first half of 2002, average sale prices for condominiums ranged from $194,000 for studios in the upper east side to $3.658 million for three or more bedrooms on the upper west side. The low end of the range is down from year-end 2001, but the high end increased over that time frame. Sale prices for lofts declined from an average of $625 per SF to $622, but sale prices for all lofts larger than 1,500 SF increased in price. Townhouses increased in price on the east side and west side, but decreased downtown. The average sale price on the east side reached $5.373 million by mid 2002. These findings demonstrate an overall pattern of continued strong demand for ownership housing in Manhattan.
It seems that the strength of the ownership market along with other economic factors has had a modest negative impact on the market for Manhattan’s rental housing. According to Corcoran, rental rates declined 6 percent between mid 2001 and mid 2002, from $3,268 to $3,071. In midtown, the decline was 8.6 percent from $3,161 to $2,887 during the same period.
Yet, rather than a sign of fundamental weakness, declining rental rates are likely the result of several short-term factors including the following: the overall decline in the national and regional economy; use of owned real estate as an alternative investment to the declining stock market; and low mortgage interest rates furthering interest in owned real estate. Each of these factors point to the decline of rental rates as a short-lived situation that should reverse itself upon the return of a healthy economic. Residential development trends have also indicated that developers expect any decline of rental housing to be short lived, as developers and investors continue to introduce new rental construction projects throughout the Manhattan.
Residential Market around the Fashion District
Several new construction projects are underway throughout the area, including one recently opened within the Fashion Center BID and one just outside the boundaries of the district on Ninth Avenue.
The newest completed project in the area is the Atlas NY on 38th Street and Sixth Avenue, which involved the demolition of a 21,600 SF office building. Six months after opening (June 2002), the building was 95 percent leased (284 of 298 units). Rental rates range from $2,090 to $4,400 and higher for studio, alcove studio, one- and two-bedrooms that range from 435 to 1,156 SF (approximately $45 to $60 / SF per year).
Another new residential project is currently under construction just outside the boundaries of the Fashion Center BID. It is located on the west side of Ninth Avenue, from 36th to 37th Streets and is known as Hudson Crossing. This project is expected to open in the spring of 2003. Rental rates have not yet been set, but there will be a total of 259 units ranging from studio to two-bedrooms. The project will also have an affordable housing component.
In addition to these new construction projects, the conversion to residential use of an existing building in the BID was recently announced. The building is located on 315 West 36th Street between Eighth and Ninth Avenues.
In summary, despite some recent minor setbacks on the rental side, the residential market remains strong. Recent and current activity in the immediate area of the Fashion District indicates the potential for success of residential development in the area if it were permitted under different zoning provisions.
Retail Market Trends
A complaint frequently heard both from Fashion District tenants and property owners is the lack of quality retail amenities and table service restaurants in the area. A strong retail presence provides neighborhood benefits on two levels. First, strong retail activity can increase profits that allow for new investment and increase the tax base. In addition, a quality retail environment can be a powerful catalyst for the improvement of conditions in other segments of the real estate market. This philosophy was expressed by many current property owners, who noted during interviews that improved retail and dining amenities would help to attract new tenants to the neighborhood.
Chart 8 - Midtown Asking Rents by Store Size, 2000-2002
Existing Conditions in the Retail Market
The recent performance of the retail market indicates that, despite the decline in the local and national economy, there is still healthy demand for retail space in Midtown Manhattan. The Real Estate Board of New York (REBNY) recently completed their fall retail report for Midtown, which indicates that retail asking rents per square foot are up in 3 of 5 categories over the past year, when tracked by store size. Over the past 2 years, rents are up in all categories.
Despite the strength of the Midtown retail market, little growth has occurred within the approximately 1.7 million SF of retail inventory within the Fashion District. The lack of growth is considered to be a result of several factors unique to this area. First, the current demand for retail on the side streets is limited since:
- Retail frontage along the side streets is not contiguous but is interrupted by loading docks and warehouse space,
- Pedestrian traffic is limited throughout the day,
- Trucks and deliveries impede pedestrian flow and the ability to merchandise effectively.
Secondly, retail performance on the avenues is held back by current conditions including:
- Non-contiguous retail uses with intermittent wholesalers,
- Inadequate merchandising and signage,
- Non-complimentary tenant mix and no cohesive leasing plan.
Retail potential on both the side streets and avenues is also affected by the demographic profile of the area. The small number of residents, and the limited spending power associated with them, limits prospects for attracting customers outside of normal business hours. Retailers and restaurateurs consider this a drawback to doing business in "9-to-5" areas such as the Fashion District, which also helps to explain why there has been little investment in either retail or restaurants in the area.
Finally, substantial destinations retailing both to the north (Times Square) and the south (Macy’s, Herald Square and 34th Street) of the district draw such a large amount of retail spending that it is difficult to lure shoppers away from those areas and inside the district without the presence of a major destination of its own.
Even with the large pedestrian counts that already exist along the avenues in the district, given the variety of negative factors influencing the current retail environment and the surrounding competition, those pedestrians are decidedly on their way somewhere else and are not likely to stop in the district to shop. To reverse this trend, the retail plan will need to include nodes of destination retailing or entertainment cultural opportunities to attract pedestrians and increase potential sales within the Fashion Center district.
Studying the Retail Potential
The Economic Profile 2002 by Robert B. Pauls, LLC indicates that estimated spending from local residents and employees plus visitors and tourists could support an additional 544,000 SF of retail space in the Fashion District. In the absence of additions to supply, Pauls indicates that the existing supply could improve performance. However, based on the study team review of the Pauls analysis, it seems that the demand estimates may be somewhat aggressive, given that a capture rate of 100 perfect was applied to the estimated spending from employees within the district. The true capture rate is likely to be somewhat lower, however finding this rate and determining the associated implications for retail potential in the Fashion District require further analysis. Any progress in addressing the identified limitations for the retail market would allow the Fashion District to capture a greater share of the demand created by new development in the vicinity. Although it is unlikely that increased retail demand would result in any significant increase in retail supply in the area (due to the configuration of existing retail frontage) the merchandising mix and performance of the existing retail could be improved substantially.
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