Building up holds Downtown down

Richard Persichetti, research manager at Grubb & Ellis New York, commutes through Downtown Manhattan, and said he often steps right into construction when he exits the bus there.

Whether it’s office space being converted to apartments or one of the few commercial buildings going up, it’s hard to miss the constant construction that seems more obvious Downtown than in any other area of Manhattan. The spread of construction hindered growth in Downtown commercial leasing activity for May and into June, while Midtown and Midtown South saw a brisk pickup, brokers said.

“Downtown, from what we see and what we hear, is still seeing little activity,” Persichetti said.

Midtown and Midtown South, however, continued to see increases in commercial leasing and rising asking rents, part of a trend that started in the first quarter of 2005, according to market reports. In Manhattan overall, the average asking rents for office space increased during May as the commercial vacancy rates declined.

The vacancy rate decreased from 9.7 percent in April to 9.3 percent in May, according to preliminary data from Grubb & Ellis.

That’s an appreciable decrease from the same period a year ago, when the May vacancy rate was 11.1 percent. At the same time, the money paid for this space increased. The average Class A asking rent in Manhattan stayed above $50 per square foot in May up to $53.48 from $51.99 in April, but well below the record of April 2001, when it climbed to $61.48 a square foot. The average Class B rate also increased more than a dollar per square foot in May, from $37.66 to $38.92.

Midtown

Midtown remained the dominant commercial market. May was the second consecutive month in which average asking rents increased sharply, climbing 3.4 percent for Class A space, from $56.24 to $58.16. Class B average asking rents increased 3.9 percent, from $41.96 to $43.60, according to the Grubb & Ellis data.

Vacancy rates in Midtown declined nearly half a percentage point in May to 8 percent. Major deals signed during the month included Viacom’s 305,000-square-foot lease at 1540 Broadway as well as the law firm Linklaters’ lease of 158,000 square feet at 1345 Avenue of the Americas. Li & Fung signed a 94,250-square-foot lease at 1359 Broadway.

The vacancy rates dropping as asking rents increased could be a sign of landlords following the herd. They notice fellow landlords raising rents, Persichetti said, and then sometimes raise theirs accordingly.

“Demand in Midtown still remains reasonably high,” Persichetti said. “A lot of it seems to be in the higher-end, Class A space.”

Midtown South

The leasing of Class B space, too, has increased in Midtown and also in Midtown South. In that area, the vacancy rate for Class B space dropped from 12.2 percent in April to 11.4 percent by the end of May, according to data from Colliers ABR. The data shows a drop of a full percentage point to 12.8 percent in Class B vacancy for Manhattan since the beginning of 2005.

“It just seems like the activity [in the Class B market] was partially from tenants looking for a better deal,” said Colliers research director Robert Sammons. “It’s like in the late 1990s, when companies searched for better deals.”

Like Midtown, asking rents in Midtown South increased as the vacancy rates declined. The neighborhood is dominated by Class B and Class C office space, and the Class B average asking rent per square foot increased to $35.36 from $34.95 in April, according to Grubb & Ellis. (The Class A average went to $35.56, a 32-cent jump.) The overall vacancy rate dipped to 8.8 percent from 9.5 percent, on par with the drop in Downtown and Midtown.

The Thornton-Tomasetti Group, a building design services firm, in May leased 70,000 square feet at 51 Madison Avenue the largest deal in Midtown South.

Downtown

Downtown’s vacancy rate declined slightly from 13.4 percent in April to 13.2 percent, according to Grubb & Ellis. Meanwhile, the average asking rent for Class B space saw an increase, from $29.88 to $31.19, while the average rent for Class A space actually declined about 80 cents to $35.88.

The largest May deal in Downtown was Morgan Stanley’s leasing of 200,000 additional square feet in 1 New York Plaza. The financial services giant plans to move employees from Midtown. The deal was a definite silver lining in a month that saw relatively good numbers, but setbacks as well.

The West Side stadium, touted strongly by Mayor Michael Bloomberg, disappeared, for one, going down to defeat largely at the hands of state Assembly Speaker Sheldon Silver, who represents parts of Downtown and who wanted to see more public money spent there rather than on a fresh home for the New York Jets. To secure Silver’s support, Bloomberg tied several incentives for Downtown to any West Side stadium. These included commercial rent tax exemptions and penalties for businesses moving from Downtown to the West Side. The stadium failed, regardless, and the incentives, for now, have disappeared.

Also, 7 World Trade Center, quickly becoming a reference point for analyzing Downtown’s difficulties, continued its struggle to draw tenants as the proposed Freedom Tower at Ground Zero languished in the wake of behind-the-scenes political wrangling.

Bigger tenants like Morgan Stanley may soon be the salvation to Downtown’s commercial challenges, Sammons said. Although he’s bullish on the prospects of Downtown, Sammons said the area, for now, simply cannot have the same appeal for smaller tenants. If Midtown and Midtown South, however, continue to see asking rents in Class B and Class A space increase, Downtown may become the beneficiary of tenants fleeing pricier office digs.

Sammons cited the estimated $80 to $90 a square foot expected in the new Bank of America and New York Times buildings in Midtown.

“Maybe some tenants are not going to pay that,” he said, “and will move Downtown.”