The Manhattan office market is now a landlord’s market. Space is tight, asking rents are rising, and new office development is scarce. Landlords, then, are finding they can offer fewer incentives to new tenants.
Traditionally, the primary incentives offered to Manhattan commercial tenants have been free rent and tenant improvement allowances that can include cash up front to modify office space. David Hoffman, executive managing director at brokerage Colliers ABR, said his firm is representing an 18,000-square-foot space at 250 Park Avenue that’s been left as “a clean white box” for prospective tenants. The landlord, Hoffman said, was prepared in March to offer $35 a square foot to tenants for modifications.
These incentives, though, are dissipating, another signal that the Manhattan commercial market is at its strongest in several years.
The overall vacancy rate for Manhattan was 6.8 percent in February, unchanged from January, according to a report by brokerage CB Richard Ellis. The asking rent for commercial space held steady from January to February at about $45 a square foot, the report said, nearly $4 above the average in February 2005.
A separate CB Richard Ellis report, also released in March, predicted a serious shortage of higher-end Manhattan office space within the current decade. Based on a projected 1.4 percent annual increase in the number of office-based employees and projected office inventory, the report stated, Manhattan vacancy rates will drop below 5 percent by 2008 and below 3 percent in 2009.
The tighter hold by landlords on incentives is no surprise. For instance, in the summer of 2000, when the market was similarly strong, incentives were meager, said Hoffman, a 22-year veteran of New York commercial real estate. In the weaker market of the early 1990s, he added, incentives were much higher. Now, landlords are pulling back on incentives as they raise asking rents.
The evidence of dwindling incentives is largely anecdotal. (Several landlords declined to comment for this article.) Hoffman, for one, said virtually all landlords are offering fewer incentives now. And why shouldn’t they? A look at February’s commercial market reveals every submarket only favoring landlords.
Midtown
Incentives are perhaps disappearing fastest in Midtown. “The overall dollars included in [incentive] packages have decreased as the Midtown market has tightened,” David Kaufman, Trizec Properties’ vice president for leasing, said of that REIT’s Midtown properties.
Space got tighter in February in Midtown as rents climbed upward. The average overall asking rent in Midtown was $54.98 in February, according to CB Richard Ellis, up 38 cents from January and more than $5 above the asking rent in February 2005.
More than 1.2 million square feet of commercial space was leased in February in Midtown, including Ross Stores’ expansion and lease renewal of 164,000 square feet at 1372 Broadway and Nautica Enterprises’ 120,000-square-foot renewal at 40 West 57th Street. The overall vacancy rate for Midtown dipped from 5.3 percent in January to 5.2 percent in February, according to CB Richard Ellis.
Midtown South
More than a quarter-million square feet of commercial space was leased in Midtown South in February, but the submarket was the only one to experience negative absorption during the month.
During February, 260,000 square feet of additional space became available in Midtown South, where the month’s two biggest leases were relatively paltry. The Jewish Association for Services of the Aged leased 25,000 feet at 132 West 31st Street, according to CB Richard Ellis, and Cement Works inked a 20,000-square-foot lease at 641 Sixth Avenue. The vacancy rate for the submarket increased slightly from January through February, rising from 5.7 percent to 5.9 percent.
Downtown
In Downtown, 260,000 square feet of office space was leased in February, about half the amount leased in January, according to the CB Richard Ellis report. Still, that February amount was nearly identical to the amount leased in February 2005, and the overall asking rent for office space Downtown increased 1 cent from January to $35.56 a foot. Also, the submarket’s vacancy rate stayed essentially the same in February at 11.5 percent, a 0.1 percentage increase over January’s rate.