Heavy competition between firms for Manhattan office space has driven the vacancy rate to its lowest level since April 2002, and brokers are preparing for a shift from a solid tenant market to one dominated by landlords.
Throughout 2004, large blocks of space flew off the shelves at such a high rate that the total inventory of class A buildings with 100,000 square feet or more available was almost halved, dropping from 65 to 34.
One large lease announced in January was for 165,000 square feet by the Bank of America at 50 Rockefeller Plaza in Midtown, with another 170,000 square feet to be taken when current tenants vacate. BNP Paribas renewal of 330,000 square feet at 787 Seventh Avenue and Lehman Brothers sublease of 314,198 square feet at 1301 Avenue of the Americas, both in Midtown, were also noteworthy.
As a consequence of all that activity, the Manhattan class A vacancy rate dropped to 9.6 percent in January from 9.8 percent in December, according to Colliers ABR. With a vacancy rate below 10 percent that appears ready to stick around for a while, brokers are taking notice of a market where landlords have more leverage than before.
“Because the vacancy rate is so low, landlords are giving much less in terms of free rent and [tenant construction budgets], and quoting prices are close to taking prices these days,” said Richard Selig, principal of The Hunter Realty Organization. “Landlords are looking for credit tenants.”
Average asking rents for class A spaces actually fell slightly to $47.94 from $48.49 per square foot, the Colliers report said. This is most likely due to several high-priced blocks being leased in Midtown, which left less expensive supply on the market. Several buildings also cut prices, but class A rents are expected to increase again as the market continues to tighten.
Robert Sammons, director of research at Colliers, said he found one aspect of January s data disturbing. The fact that employment numbers are lagging behind increases in leasing, and reports of more layoffs at big financial services companies like Citigroup, could lead to a case of expectations not being met.
“It bothers me, quite frankly,” he said. “The hard numbers haven t translated into all this space leasing.”
That disparity may be a sign of firms putting the cart before the horse in an attempt to lock in lower rents ahead of expected hiring. Or it may be that the government numbers for employment activity, which initially are estimates, may go up when revised numbers are released next month, Sammons said.
Midtown
Midtown saw class A office vacancy rates plummet from 8.9 percent in December to 8.4 percent in January, according to Colliers, even with the addition of two new buildings to the inventory the Bloomberg Tower at 731 Lexington Avenue and the Museum of Modern Art s new office tower at 25 West 53rd Street. Additionally, 271,000 square feet at 505 Fifth Avenue, currently under construction, will be added to inventory, according to CB Richard Ellis.
Leading the Manhattan-wide trend of falling asking prices, Midtown saw its class A average asking rent fall to $57.10 from $57.53 per square foot, according to Colliers, though Grubb & Ellis showed asking prices for Midtown s class A space increasing from $55.03 to $55.37 per square foot and class B space jumping from $41.03 to $41.23 per square foot.
“It s also been very difficult for tenants in the market because prices have been going so high in the Midtown market,” Selig said. “So tenants are looking to secondary buildings, side-street buildings, which also have grown in price, so it s a very tough market for tenants all around.”
Midtown South
While the shortage of space in Midtown may have caused Downtown to perk up a bit, Midtown South, from Canal Street to the mid-30s, was relatively flat in January, with its overall vacancy rate edging down just 0.1 percent to 11.3 percent, according to Colliers. The area s average asking rent fell off from $30.56 to $30.38 per square foot.
Tighter vacancy rates in Midtown “definitely has created more of an interest in Downtown, but Midtown South, not so much so yet,” Sammons said. “In Midtown South, it s largely a B and C class market, and there are very few A buildings.”
Downtown
Several major deals are pending Downtown, below Canal Street and Chambers Street. In the meantime, its class A vacancy rate leapt to 13.4 percent from 13.2 percent.
Four Downtown buildings were taken out of inventory due to conversion to residential use, a trend that should continue over the next few months as more B and C buildings are removed from the commercial sector. However, factoring into many firms vacancy rates is 7 World Trade Center with 1.7 million square feet of space to become available for tenant possession in the first quarter of 2006, which would increase current availability to 16.6 percent, according to CB Richard Ellis.
“There are firms looking at the building, but no one has signed a lease yet,” Selig said.
There was a flurry of activity in the last quarter of 2004 as a lot of small and medium-sized firms, and a couple large ones, attempted to lock in space before Sept. 11 incentives expired, said Adam Leshowitz, director at Newmark s Downtown office.
Average asking rents continued to climb for the second month in a row, landing at $33.66 per square foot after growing from December s average rent of $33.56 per square foot. Yet the disparity between Midtown and Downtown pricing hasn t caused a deluge of lessees moving south.
“New York right now is a tale of two cities,” Leshowitz said. “The spread between Midtown and Downtown is the largest it s been, say the so-called experts, in 20 years. Ultimately, I think that will lead to increased activity as people see Downtown as an economic alternative to Midtown.”
“However, I don t know that we re seeing escalated activity directly as a result of dynamics between Midtown and Downtown right now,” he added. “Perhaps in three to six months.”
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