The Real Deal New York

Manhattan office vacancy: How low can it go?

November 16, 2007
By Tom Acitelli

The Manhattan commercial market began 2006 at probably its strongest state since the dot-com bust more than five years ago. The overall vacancy rate for the borough shrank to 8 percent by the end of 2005, according to Grubb & Ellis, a percentage that the brokerage says signifies equilibrium for the market.

“On the national level, Grubb & Ellis defines equilibrium at 10 percent,” said research manager Richard Persichetti. “New York City, it’s different than that. When vacancy is between 8 and 9 percent, the market has reached equilibrium.”

Which means what, exactly?

For one thing, it means office landlords may shoot asking rents upward in 2006, as the market continues to shift in their favor. It also means that, generally, every submarket – Downtown, Midtown, and Midtown South – should get even tighter as the year drags onward, with tenants scrambling for dwindling available space. Only two new large office buildings, in fact, are expected to open up in Manhattan in 2006: 7 World Trade Center, the 1.7-million-squarefoot tower in the Financial District, which as of mid-January had only two tenants besides landlord Larry Silverstein, and the approximately 275,000-square-foot space 505 Fifth Avenue in Midtown, which is already about 50 percent leased, Persichetti said.

This double-edged reality of less space at a higher price may dominate the commercial scene this year. “You’re going to have different tenants looking at similar space,” Persichetti said. “You’re going to have landlords raising rents. They’ll be able to pick from who they want to lease to, so to speak.”

The overall Manhattan vacancy rate for the fourth quarter of 8 percent was a drop from 8.9 percent in the third quarter and from 10.5 percent in the fourth quarter of 2004, according to Grubb & Ellis, whose figures are lower than some other brokerages’ estimates. The average overall asking rent for Class A space in Manhattan was $58.34 a foot, up nearly $1 on average from the third quarter and more than $3 from the fourth quarter 2004.

Midtown
Midtown’s vacancy rate dropped significantly in the fourth quarter, Grubb & Ellis reported, from 7.4 percent in the third quarter to 6.6 percent in the fourth – putting it below equilibrium. That could mean the vise already around the Manhattan market could be particularly tight for Midtown, a submarket that now has little in the way of big blocks of space. Four of the five biggest leases of the fourth quarter, in fact, were all inked in Midtown and all involved 230,000 square feet or more, according to Grubb & Ellis, with Citibank’s 296,756-square-foot lease at 485 Lexington Avenue the biggest.

The average asking rent for Class A space in Midtown increased nearly $1 to $64.68 a foot in the fourth quarter, and the Class B space asking rent did the same, to end 2005 at $45.39 a foot, Grubb & Ellis reported.

Midtown South
Asking rents went up in the fourth quarter in Midtown South as well. The cost of Class B space, the dominant office type in the submarket, went from $36.78 to $37.76 – which is also more than $4 above the average asking rent at the end of 2004. The Class A asking rent climbed above $40 – to $40.64 a foot – for the first time since 2001. Like Manhattan in general, Midtown South remained at equilibrium at year’s end as its overall vacancy rate declined to 8 percent from 8.6 percent in the third quarter. The vacancy rate there stood at almost 10 percent at the close of 2004.

Downtown
Equilibrium eluded Downtown at the close of 2005. The submarket has struggled for more than four years with high vacancy rates and stagnant rents. At the end of 2004, the Class A asking rent average was $36.76 a foot; at the end of 2005, it was $36.59. At the end of 2004, the Downtown vacancy rate was 13.6 percent; in the fourth quarter of 2005 it was at 11.7, down from 13 percent the quarter before.

But the Grubb & Ellis numbers don’t include 7 World Trade Center, which is not expected to open until at least March. If the numbers did, Persichetti says, the vacancy rate would be 1 or 2 percentage points higher.

Generally, though, the Manhattan commercial market remains at its strongest this decade – not only in the scope of the market’s history, but also in comparison to other cities’ commercial markets. Over the summer, for instance, when the vacancy rates were higher, Manhattan still had lower Class A vacancy rates than every other major city on the continent, according to brokerage Colliers ABR, such as Chicago (vacancy of 20 percent) and Toronto (10.4 percent).

And, in a recent report, the University of Southern California noted that downtown Los Angeles’ vacancy rate had reached 15 percent by the end of 2005, a ballyhooed feat not seen since the 1980s. Such a rate, of course, would give Manhattan commercial brokers serious pause.

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