After an exuberant first quarter, the Manhattan office leasing market started sluggishly in April, and continued to lag into May, a stark contrast to the healthy commercial sales market.
Relatively few large leasing deals were clinched in April, with the largest being McDermott Will & Emery’s relocation from 50 Rockefeller Plaza to 160,000 square feet of space at 340 Madison Avenue in Midtown.
The slow pace of leasing continued into May. The only large deal sealed in the first three weeks of the month was Viacom signing for 305,000 square feet at 1540 Broadway in Midtown.
“The first quarter was a great period for leasing,” said Robert Sammons, director of research at Colliers ABR. “In April and May, it slowed down a bit, and it wasn’t as healthy as people probably thought it was.”
Still, the market fundamentals remained strong, with the average Class A asking rent in Manhattan topping the $50-a-square-foot level for the first time in three years, closing at $50.72 a square foot in April, which was up from $49.55 a square foot in March.
Midtown
Midtown, particularly its Plaza and Grand Central submarkets, was the largest contributor to that asking price growth. JP Morgan Chase put 712,000 square feet of space at 245 Park Avenue on the sublease market in March at $72 a square foot, and Midtown may still be seeing the residual effects of that, said Patrick Robinson, managing principal of The Staubach Company.
“Putting 700,000 square feet on a market that’s relatively tight at a big rent, that would have moved the market in and of itself,” he said.
Midtown’s Class A average asking rent rose to $60.47 in April from $59.14 in March, according to Colliers.
For all of Manhattan, average rent for Class A space, at $50.72 per square foot, still remains 17.5 percent below the record level in April 2001 when it rose above $61.48 a square foot.
“At that time, the vacancy rate was just 4.9 percent, thus there remains some serious ‘wiggle room’ for rising asking rents (and thus effective rents),” Sammons said. Overall vacancy rates in Manhattan fell to their lowest level in three years, closing April at 9.4 percent, which was a bit less than the 9.5 percent seen in March.
Sammons said he believes the fall-off in leasing activity is the result of worries about the economy and a potential housing bubble that could affect the office market. As well, it could be the fallout from a spurt of leasing activity in the fourth quarter of 2004 and 2005’s strong first quarter.
“There were a number of fairly large tenants in the market then, and they leased their space, and there’s a kind of lull as everyone watches to see what happens with the economy,” he said.
If the economy holds up, there may be another spurt of leasing activity in coming months, Sammons said, though there are a couple of large tenants, such as Citigroup, that have never left the market and remain on the prowl.
Midtown South
In Midtown South, an area dominated by Class B and C spaces, the largest deal was a 36,000-square-foot renewal and expansion by Oxford Industries at 3 Park Avenue, according to a monthly report by CB Richard Ellis, and leasing in the area continued to outpace 2004.
“I have noticed firms, especially financial service firms, taking additional space in new locations basically expanding,” Sammons said.
While overall asking rents in Midtown South had surpassed Downtown for the first time in recent history in March, the Class A average asking rent fell a bit to $34.14 a foot from $35 a foot in April, according to Colliers.
Looking back over the past 24 months, Robinson said he believes a lot of the leasing activity handled by Staubach, a real estate advisory firm for office, industrial and retail clients, has been renewals, with some expansions, but relatively few moves.
“Fifty percent of our work was doing renewals,” he said. “Nobody wanted to put out capital to move. Nobody wanted to commit to a long-term deal.”
That was changing in late May, he said.
“Today, there appears to be an inordinate amount of hedge funds and boutique financial companies who are willing to move, find new premises and sublease their former premises. There’s a lot of velocity.”
Downtown
Downtown continues to weather troubles in its office market, hampered by political turmoil surrounding the former World Trade Center site. Still, Downtown vacancy rates for Class A space dropped in April to 12.4 percent from 12.7 percent in March, Sammons said.
“It’s more solid, certainly,” he said. “There are some issues obviously with 7 World Trade Center, and the World Trade Center site, and with Goldman Sachs.”
Class A rents also muscled their way upward from $33.43 in March to $33.60 in April after remaining flat previously, he said.
The largest deal was a 43,000-square-foot lease by CrossBorder Solutions at 1 New York Plaza, according to CB Richard Ellis.
Still, brokers hold out high hopes for Downtown given the excellent quality of Class A office space.
“There have been some big deals down there that people have committed to because the real estate economics are very compelling,” Robinson said. “There are world-class Class A buildings, like 1 Liberty Plaza, 3 World Financial Center, 199 Water Street and 1 New York Plaza, and many of them have better physical structures with better infrastructure than the choices in Midtown.”
One issue holding back some tenants from moving to Downtown is being somewhat offset by the area’s growth as a residential community, especially with a spate of conversions of office buildings to residential space, Robinson said.
“The economics Downtown are compelling, but the only thing keeping companies in Midtown is that a bank or hedge fund or company otherwise profitable enough to be there has to compete for employees and most people still prefer to be in Midtown.”