Despite credit crunch, commercial market enjoyed a strong 2007

By James Kelly | January 08, 2008 03:29PM

Commercial rents began to slow down in the end of 2007, although supply remains tight, at its lowest since early 2001, according to a year-end report released today by commercial brokerage Cushman & Wakefield.

The brokerage predicted a possible stall in rent increases this year at a release event for the report. A substantial amount of layoffs that would have a major impact on the market’s vacancy rate and rent prices — from 100,000 to 150,000 jobs — would be likely only in the event of a national recession, said Kenneth McCarthy, a managing director at Cushman & Wakefield.

“The pace of rent increase has slowed down dramatically,” said Joseph Harbert, a COO at Cushman & Wakefield.

Overall rent in Manhattan was up to $65.08 per square foot at the end of the fourth quarter, up slighltly over $2 from $62.91 in the third quarter. Rents have increased around $14.50, from $50.56 in the fourth quarter of 2006. 

McCarthy was bullish on the first quarter of 2008, though he said “the second quarter will depend on what happens in the national economy … our uncertainty is about the second quarter’s behavior.”

McCarthy said that a flattening out of office rents may be expected, although a lowering in prices is unlikely.

“We’re seeing a lot of write-offs [in the financial services]; we’re not seeing a lot of layoffs,” McCarthy said. “We’re waiting for the other shoe to drop.”

Leasing activity was around 23.6 million square feet in 2007, down 12.8 percent from 2006, due in part to the market’s constrained supply. The fourth quarter saw only around 5 million square feet leased.

However, there were 30 leases over 100,000 square feet in 2007; and despite the problems in the credit market last summer, 17 of these leases were signed in the year’s second half.

The availability of large spaces is dwindling in Midtown South and Downtown, Harbert reported. Even tenants in the 50,000 to 100,000-square-foot range have trouble finding space in these submarkets, he said.

Manhattan’s overall vacancy remained at 5.7 percent, the same as the third quarter, the report said. The figure was down 1 percent from the end of 2006.

The proportion of space leased to media and communications businesses increased notably in 2007. These tenants represented 9.8 percent of the space leased, compared to 4 percent in 2006, Harbert said.

As for submarkets, Harbert called Midtown South and Downtown “the beneficiaries of a shortage of space and increasing rents in Midtown.”

Although the vacancy in Midtown ticked up to 5.8 percent in the fourth quarter from 5.6 percent in the third quarter, it remains well below the 8.4 percent figure recorded at the end of 2006.

Average rent in Midtown was up to $76.26 per square foot, from $74.47 in the previous quarter, and up 29.5 percent from $58.92 a year earlier.

The vacancy rate in Midtown South remained at 4.7 percent from the end of the third quarter, down from 5.6 percent at the end of 2006. Average rent there was $46.89 per square foot, up around $1 from $45.83 per square foot in the third quarter, and up from $40.55 per square foot for the fourth quarter of 2006.

Downtown’s supply continues to tighten, with the vacancy falling to 6.2 percent, from 6.7 percent in second and third quarters, and 6.4 percent at the end of 2006. Average asking rent in Downtown climbed to $47.47, from $45.86 in the third quarter, and from $58.92 from a year ago.