The Real Deal New York

Office vacancy rate hits 2-year low

October 16, 2007
By Will Swarts

Conditions are improving in the city’s office leasing markets, according to Grubb & Ellis, which recently reported that Manhattan’s office vacancy rate dropped to 10.5 percent in September, its lowest rate in 26 months.

A modest economic recovery has given the Midtown leasing market a lift, though Downtown is seeing a growing vacancy rate in all types of office space, according to the September monthly report issued by Colliers ABR.

Midtown saw the biggest rise in leasing from the previous month, with a 9.3 percent vacancy rate for class A office space in September, down from 9.8 percent in August, according to Colliers.

“Midtown probably represents about 70 percent of all leasing activity this year,” said Richard Persichetti, senior research analyst at Grubb & Ellis. “It has been more the case that tenants are moving around and taking new space. There aren’t many new companies coming to the market, but the amount of movement has been enough to drop the vacancy rate.”

A third-quarter report by Cushman & Wakefield said new leasing in the city has increased by more than six million square feet compared to the same period a year ago.

Midtown

The class A vacancy rate continued to drop for the third straight month, as Morgan Stanley completed a renewal of 364,000 square feet at 750 Seventh Avenue and the law firm Hunton & Williams leased 133,000 square feet at 200 Park Avenue. Additionally, Time Warner pulled 210,000 square feet off the sublease market for its own use and Est e Lauder leased 62,813 square feet at 110 East 59th Street. Colliers said the average asking rent climbed to $55.78 a square foot in September, up 1.5 percent from August, when asking rents averaged $54.95 a square foot.

Meanwhile, subleasing activity stayed relatively flat, according to Grubb & Ellis.

“Midtown has definitely gotten tighter,” said Robert Sammons, research director at Colliers. “Things are much improved and the pricing is much stronger. That’s good for landlords and owners and not so good for tenants.”

Leasing has been further bolstered by the improving local economy.

“The New York City economy has continued to strengthen throughout 2004,” said Persichetti in his report. “Gross city product grew for the third consecutive quarter and unemployment dropped to the lowest level it has reached in several years; add positive job growth to the mix and these improvements have helpedécorporate decision makers feel more comfortable with their decisions to lease space.”

Midtown South

While this market was not as strong a performer as its neighbor to the north, Midtown South’s 11.9 percent vacancy rate in September was still a slight improvement from the August rate of 12.1 percent.

Persichetti said most of the activity in the area is still driven by the garment industry, but a 91,299 square foot lease by WebMD Corp. at 111 Eighth Avenue and CHF Enterprises’ 53,000 square foot renewal at 1 Park Avenue were key September transactions.

Average asking rents for the last month remained flat at $29.58 a square foot, up one cent from the August figure of $29.57 a square foot. That represents a 6.2 percent increase from the same period a year before, according to Colliers.

Downtown

Vacancy rates climbed across all classes of Downtown office space in September, and analysts said the looming expiration of city and state incentive programs will exacerbate the market’s weakness. Colliers said the class A vacancy rate was 13.2 percent for September, up from 11.3 percent in August.

Though expected, the decision by JP Morgan Chase to place on the market 588,000 square feet of directly leased space at 1 Chase Manhattan Plaza and 298,000 square feet of subleased office space at 95 Wall Street was responsible for the jump in vacancy rates.

“Chase is in consolidation mode, more so now that they are also working through the effects of their merger with Bank One in Chicago,” Sammons said. “This is cost-cutting, but you still have a lot of prospective tenants kicking the tires Downtown.”

The average asking rent for class A space declined slightly to $35.03 a square foot in September, down from $35.47 a square foot in August, according to Colliers.

The Jan. 1 deadline for new entrants into the Small Firm Attraction and Retention Grant Program, a city and state incentive program that offers grants at a rate of $3,500 per employee will take some wind out of the market’s sails, according to Persichetti.

“If [new tenants] weren’t drawn by that, I don’t see them coming Downtown,” he said.

The class A vacancy rate will remain stable and even decline if a significant new tenant is able to arrange incentives for a Downtown relocation or expansion, Sammons said. Meanwhile, class B and C vacancy rates have risen enough to prompt numerous conversions to residential space, he said.

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