The Real Deal

• Email this article
• print
• Comments(0)

Manhattan office market sees vacancy rise

In the wake of the credit crunch, vacant space is becoming more plentiful in Manhattan, though rents appear to be holding up well for now, especially in Midtown.

The vacancy rate throughout Manhattan hit 7.6 percent in October, up from 6.8 percent the month before, according to the latest report from brokerage Colliers ABR.

Midtown South saw the biggest increase in vacancy by far, with a jump of more than 2 percentage points to 9.7 percent over the course of a month.

The changes are part of a clearly visible slowdown in Manhattan's commercial market, the subject of an in-depth series in this month's issue (see The Commercial Slowdown).

"The climate is beginning to change," acknowledged Steve Coutts, senior vice president of national research services at Studley. "Up until now, landlords have been more or less in the driver's seat. But things are going to become more favorable from a tenant's perspective."

However, rents throughout the borough were up compared to the month before, a sign that landlords are holding firm in their demands despite any softening in the market.

The average office rent in Manhattan was $64.08 in October, up nearly $1 from $63.19 the month before. In Midtown, rents rose to $79.16, up more than $2 from the month before.

"Rent growth is still king in Midtown," said Coutts.

The market also got some good news in the level of leasing activity in October, up significantly compared to a slow September, though still down compared to the same time last year.

The volume of leasing activity in Manhattan was up 56 percent between September and October, jumping to 1.76 million square feet from 1.13 million square feet, according to a CB Richard Ellis report. Year over year, this figure was around 12.5 percent lower than in October 2006, when 2.01 million square feet were leased.

A survey by The Real Deal revealed that despite the upturn in leasing volume in the short term, pessimism remains the dominant feeling among industry experts.

Barry Hersh, associate director of the Steven L. Newman Real Estate Institute at Baruch College, said he predicts a slowdown in leasing activity in 2008. He added that he was surprised that the market "has held up as much as it has."

Apprehension has circulated that layoffs caused by large write-downs at financial services companies will decrease demand for space.

"The problems are beginning to take a toll, and that could result in layoffs," said Ira Fishman, executive vice president at Winoker Realty. "That means fewer employees, less demand for space and possibly a decrease in price."

According to Coutts, overall job growth is expected to fall to below half a percent in 2008, but any addition of workers whatsoever will be positive for the market. And many experts maintain that fears of decreased prospects for the financial sector are overstated.

Simon Wasserberger, senior vice president at CB Richard Ellis, put the effect of any possible layoffs into perspective. "There are 400 million square feet of office space in Manhattan," he said. "You could lay off 10,000 people, and it would still barely move the needle as far as the supply. And nobody is predicting 10,000."

Wasserberger estimated that the highball figure of 10,000 lost jobs would free only 2.5 million square feet of space, an almost negligible 0.75 percent of Manhattan's market.

Fishman added that while he does expect some correction in lease prices, he doesn't believe any decrease will be sharp or long-lived.

"If demand lessens because of the problems in the financial sector, prices will plateau and even decline slightly," said Fishman. "[But] there will always be demand in Manhattan, because that's where businesses want to be."


Midtown

The vacancy rate increased to 6.9 percent in October from 6.4 percent during the prior month in Midtown. This is also up from a 6.8 percent vacancy rate in October 2006.

Despite the vacancy rise, rent growth in Midtown continues to outpace the rest of Manhattan. The disparity in prices between Midtown and Downtown is at an all-time high, according to Coutts. He reported that the difference in average rents between Midtown and Downtown Class A office space is up to $35.68 -- its highest since Studley began tracking the statistic. The percent difference in average rents is up to 58 percent, close to what it was in 2000 and 2001.

The average asking rent in Midtown was $79.16 in October; increasing $2.35 per square foot from the previous month. It was up $18.96 -- over 31 percent -- from October 2006.

Fishman agreed that Midtown is the healthiest submarket right now. He said that one reason for this is that there is very little new office construction in historically expensive areas like the Plaza District, so the supply there remains tight.

The amount of space leased in Midtown was up over 51 percent between September and October, according to CBRE.

Leasing activity was 1.09 million square feet in October, from 720,000 square feet in September.

Compared to last year, it was still lower than the 1.17 million square feet leased in October 2006, however.


Midtown South

The vacancy rate in Midtown South climbed significantly to 9.7 percent in October, from 7.4 percent in September, and 8.2 percent in October 2006.

The average asking rent in Midtown South was up 43 cents per square foot in October from the previous month.

The average was $47.09 per square foot, compared to $46.66 per square foot in September, and up over 26 percent from $37.18 per square foot in October 2006.

The market's leasing activity was up 50 percent from September to October, according to CBRE. The submarket saw 330,000 square feet leased in October, from 220,000 square feet in September, but was down 36.5 percent from 520,000 square feet in October 2006.


Downtown

Last month advertising agency Omnicom took 183,000 square feet at 195 Broadway, reportedly setting a record for the amount of office space ever taken by a creative firm Downtown. Wasserberger says this deal is representative of a larger trend developing in the district.

"There was a time when Downtown was completely dependent on financial firms," he says. "Now, who cares if the financial tenants are expanding or not? You're not as dependent on that anymore." Unlike Midtown and Midtown South, Downtown's vacancy rate continued to drop, to 7.2 percent in October from 7.4 percent the month before. Year over year vacancy is down significantly from 10.3 percent in October 2006.

Leasing activity was up 56 percent in October, according to CBRE. There were 340,000 square feet of space leased in October, compared to 180,000 square feet in September. Also unlike Midtown and Midtown South, activity was slightly higher than last year, with 320,000 square feet leased in October 2006.

The average asking rent Downtown rose 2 cents to $48.14 per square foot in October. The average rent was up 20 percent from October 2006, when rents averaged $40.12.