Rents rose so high and vacancy rates dipped so low in the first half of 2006 that some analysts wonder aloud now whether the pricing in the Manhattan commercial market has shifted fundamentally — and permanently — upward.
Second-quarter numbers compiled by brokerage Cushman & Wakefield show 20 Manhattan leases were signed in the first six months of 2006 with asking rents of above $100 a foot; just 10 were signed last year. Also, there were 23 Midtown lease deals between 50,000 and 100,000 square feet of space inked in the first half of this year, three more than in all of 2005.
This leasing helped drive the overall vacancy rate in Midtown to 6.9 percent in the second quarter, down from 7.8 percent in the first quarter.
Average Manhattan asking commercial rents stood at $43.46 a square foot for the three months ending June 30, according to Cushman & Wakefield, the highest level in nearly four years. The average asking rent for Class A space in Midtown hit more than $56 a foot in the second quarter, its highest amount since at least 2002.
These moves helped place Manhattan 7th among the world’s 10 most expensive cities to lease office space, according to an analysis by Cushman & Wakefield. Manhattan, the most expensive location in North America, was the only city in the Western Hemisphere ranked among the 10 priciest this year; it ranked 11th last year.
Manhattan could well keep moving up the list, as the city’s economy shows no signs of slowing. The city’s May unemployment rate was its lowest in 18 years and demand remains steady for commercial space, with the overall vacancy rate dipping to a five-year low of 7.8 percent in the second quarter.
If Manhattan does cross a threshold that makes the current overall asking rent of $43.46 a foot seem like a deal, then tenants — and their brokers — could face a radically changed market. It’s too soon, however, to tell if that’s happening.
“We could be in a period where we have a fundamental problem rather than a temporary one,” said Joseph Harbert, COO for Cushman & Wakefield’s New York metro region. “Whether there’s something deeper in the numbers, we don’t know yet.”
What is clear from the second-quarter numbers is that Manhattan’s commercial market remains at its healthiest since September 11. More than 7 million square feet of office space was leased in the second quarter, according to Cushman & Wakefield, the strongest second quarter for leasing in years. And, from January through June, $8.7 billion in Manhattan office space was sold, for an average of $583 a square foot, according to brokerage Trammell Crow, nearly 50 percent more than the typical volume.
Midtown
Harbert said in mid-July he knew of more than 40 tenants looking for blocks of Manhattan commercial space of at least 100,000 square feet and at least 15 wanted 250,000 square feet or more.
They would be hard pressed to find it in Midtown. The vacancy rate for coveted Class A space in Midtown drifted to 6.8 percent in the second quarter, its lowest level in five years, according to Cushman & Wakefield. As space disappeared from the market, asking rents rose.
The average asking rent for Midtown space reached $50.35 in the second quarter, up more than 60 cents over the previous one.
Midtown South
Midtown South emerged from the second quarter as the tightest commercial business district in the United States, according to Cushman & Wakefield, with a vacancy rate of 6 percent.
That’s a drop from the first quarter rate of 6.2 percent, reminiscent of Midtown South during the dot-com boom of the late 1990s, when vacancy rates dipped — and stayed — below 6 percent. Total available space in the submarket plunged over the 12 months ending June 30, Cushman & Wakefield reported, dropping 34 percent to 3.9 million square feet.
The average asking rent for Midtown South space rose through the second quarter, from $34.70 by March 30 to $35.78 by June 30.
Downtown
Seven World Trade Center, the 52-story tower that’s seen as a barometer of Downtown’s commercial future, has been on the market now for more than half a year. Rather than driving vacancy rates upward, as many analysts feared, 7 World Trade has had little to no effect on the submarket’s rates — at least so far.
The overall Downtown vacancy rate dropped to 11.2 percent in the second quarter from 11.6 in the first, according to Cushman & Wakefield, and down from 12 percent in the second quarter of 2005. 7 World Trade itself has lured a combination of mostly public and private entities to take about half the space in the 1.7-million-square-foot tower, although one major lease of 200,000 square feet, by Chinese real estate firm Beijing Vantone, reportedly fell through in mid-July over credit disputes.
While having little effect on vacancy rates, 7 World Trade has impacted Downtown asking rents. The tower has been charging tenants at least $50 a foot since it came on market, although government incentives for leasing Downtown may lighten the amount.
Still, the higher rent helped drive up Downtown’s Class A asking rent average to $40.23 a foot, $6 higher than during the same period last year and up 75 cents from the first quarter. The overall asking rent Downtown was $35.18 in the second quarter, according to Cushman & Wakefield, a slight tick upward from the first quarter.
