Financial service firms trying to get a leg up on the competition for office space spearheaded a flurry of year-end leasing deals that boosted Manhattan office occupancy rates for December 2004 and the fourth quarter to the best level in three years.
Both Lehman Brothers and Wachovia Bank closed big deals in Midtown, and Morgan Stanley took nearly 450,000 square feet Downtown. Financial firms are facing off against law firms, the top space takers over the past two years.
The class A office vacancy rate for Manhattan was 9.8 percent in December, compared to 10.3 percent in November, an improvement of 0.5 percent, according to Colliers ABR.
The holiday month was the first time the office vacancy rate had fallen below the 10 percent threshold since September 2002, when the rate was 9.9 percent, the report said.
For the entire year, about 29 million square feet of office space was leased by businesses in Manhattan, 9 million more square feet than in 2003, according to a Cushman & Wakefield report.
The C & W report put the overall vacancy rate for all classes of space at 11.1 percent at the end of the year, its lowest level in nearly three years.
The C & W report also said that despite declines in available space, overall average rents in Manhattan actually fell to their lowest price in five years, averaging $39.47 per square foot.
“The large amount of office space available on the market over the last 18 to 24 months has been a catalyst for lower rent prices,” said Jim Delmonte, director of research at C & W. “But that’s not going to continue in 2005 because available subleases are being absorbed by financial and legal firms.”
The Colliers report had a more positive take on rent prices for class A space, finding average asking rents rose to $48.49 per square foot in December, up from $47.95 per square foot the month before.
Financial services companies and law firms are locking in large blocks of 100,000 square feet or more in an attempt to circumvent anticipated rising rents and the need for additional space to accommodate the future hiring of employees.
In the late 1990s, financial service firms were often outbid by Internet companies flush with cash. Today, their competition is no longer high-tech companies, but law firms, according to Robert Sammons, director of research at Colliers.
Midtown
Midtown was the big winner during the holidays, as Lehman acquired a 306,700-square-foot location at 1301 Sixth Avenue, and Wachovia took 180,000 square feet in the Seagram Building at 375 Park Avenue.
“Financial companies have been interested in renting more space because of the upturn in the economy. They don’t want to be caught short-sighted,” said Sammons.
The Midtown class A vacancy rate fell to 8.9 percent, the lowest since October 2002, when the rate hit 8.8 percent, according to Colliers.
In addition to big leases, boutique financial firms, including hedge funds, were rushing to gobble up space.
“Small hedge fund businesses are fond of the Plaza and Grand Central area because they’re more prestigious, likely to impress their client roster and because many of the owners live on the Upper East Side, Westchester or Fairfield County, which is convenient to Grand Central and Metro-North,” said Sammons.
Unlike other parts of town, increased leasing activity in the Midtown area drove prices up by 9.9 percent over the past year.
For year-end, the class A average asking rent reached $57.35 per square foot from $57.48 per square foot in November and $52.37 per square foot in December 2003, according to Colliers.
Midtown South
Midtown South, from Canal Street to the mid-30s, was not left out of the improved leasing climate.
Its overall vacancy rate (for all classes of space) fell to 11.4 percent in December from 11.6 in November, due to a lot of small deals.
Average rent price dropped to $30.56 per square foot in December from $31.10 in November, according to Colliers.
“Certain blocks of buildings on Hudson Street dropped their prices slightly,” said Sammons. “One block lowering its office rents can affect an entire neighborhood.”
Downtown
Below Canal Street and Chambers Street, Downtown office vacancy rates benefited from several large deals.
Morgan Stanley took a 447,000-square-foot block of long-term sublease space at 1 New York Plaza, and TD Waterhouse consolidated from two other downtown locations by closing on 137,000 square feet of space at 32 Old Slip.
These deals helped the class A vacancy rate drop to 13.2 percent from 14.4 percent in November, the Colliers report said. The average asking rent price for class A space increased to $33.56 in December from $33.12 in November.
Analysts and experts agree that increased leasing activity is expected to continue through 2005 providing there is no sudden economic downturn or another terrorist attack.
“We expect demand to shift Downtown as space gets leased up in Midtown. If operations want to stay in Manhattan, the Downtown area may contain the only available office space left,” said Delmonte.
The December 31, 2004 expiration of the WTC Small Firm Attraction and Retention Grant Program also helped push down the vacancy rate, as applicants rushed to file paperwork before the deadline for financial aid.
“They wanted to lock in rent prices while they could get those incentives, but it’s only good for those companies that have less than 200 employees,” said Sammons.
Tenants who signed leases prior to New Year’s Eve last year have until April 1, 2005 to turn in documents to qualify for a grant with the expired incentive program. The Lower Manhattan Economic Revitalization Plan and other discretionary grants remain in place.