The Manhattan commercial market in the third quarter had one of its busiest three-month periods in years, analysts said, with vacancy rates in the borough’s submarkets generally dropping as asking rents continued to climb.
The borough’s vacancy rate for all types of office space dropped to 7 percent in the third quarter, the lowest total since 2001. It dropped from 7.8 percent in the second quarter and showed a decline from 9.6 percent in the third quarter of 2005, according to the brokerage Cushman & Wakefield. By the third quarter’s end, the absorption rate, or the total space taken off the market this year, hit 2.1 million square feet, despite the addition of 1.7 million square feet of office space at the start of 2006.
Large blocks of top-quality office space are especially scarce now. Only five blocks of contiguous Class A space of at least 250,000 square feet remained in Manhattan by the end of the third quarter on Sept. 30 — three in Midtown and two in Downtown. The Class A vacancy rate was down to 6.6 percent from 7.7 percent the quarter before.
Companies, though, keep hunting in Manhattan.
“The need doesn’t always coordinate with availability, and, often, availability doesn’t always coordinate with need,” said Stephen Siegel, global chairman of brokerage CB Richard Ellis. “There’s a tremendous amount of [leasing] activity now from the service sector and the financial services sector. Really, it’s across the board.”
This brisk leasing comes as office space continues its pricey ascent.
The average asking rent in Manhattan was $45.84 a square foot at the end of the third quarter, Cushman & Wakefield reported, up from $43.46 in the second and $41.35 a foot a year ago. Rents in prime office buildings are reaching well over $100 a square foot, and the investment sales market in Manhattan is on pace in 2006 for a record year (see below).
Midtown
Only two Midtown Class A buildings are expected to be completed in the next 18 months — the New York Times headquarters on Eighth Avenue and One Bryant Park on 42nd Street — and each is already 85 percent pre-leased, Cushman & Wakefield reported.
“With much of the development in Midtown already spoken for, it’s going to become increasingly difficult to find office space, especially for those tenants looking for large, contiguous blocks of space,” said Joseph Harbert, COO of the New York metro region for Cushman & Wakefield.
Midtown’s vacancy rate dropped from 6.9 percent in the second quarter to 6.5 percent in the third. The rate for Class A Midtown space, the most coveted in Manhattan, dropped from an already five-year low of 6.8 percent in the second quarter to 6.3 percent. More than 4.2 million square feet of Class A space was taken off the Midtown market in the third quarter.
And it was snatched for increasingly higher rents. The average asking rent in Midtown was $53.02 a square foot in the third quarter, up from $50.35 the quarter before and $48.06 in the third quarter of 2005. The Class A rent was $59.47 a foot in Midtown in the third quarter, up from $56.08 in the second.
Midtown South
The vacancy rate in Midtown South ticked slightly upward in the third quarter, rising 0.1 percent from the second quarter to 6.1 percent. And the vacancy rate for the Class B space that dominates the submarket was also up quarter over quarter, from 7.5 percent in the second quarter to 8 percent through September.
Midtown South, however, remains tight. It has, for instance, just three Class A spaces of at least 100,000 contiguous square feet, Cushman & Wakefield reported, and the vacancy rate for Midtown South Class C space is 3.7 percent; the rate for Class A space is similarly low at 5.6 percent, below the overall Manhattan Class A vacancy rate.
Downtown
Four of the top 10 leases in Manhattan in the first nine months of 2006 were inked in Downtown, including the two biggest of the third quarter. Moody’s Investors Service took 589,945 square feet in 7 World Trade Center, and the city’s Department of Transportation leased 429,258 square feet in 55 Water Street.
More than 4 million square feet of office space was leased in Downtown in the first nine months of 2006, compared to 3.4 million during the same period last year. This absorption helped drive down Downtown’s vacancy rate in the third quarter to its lowest level since September 11; it dropped from 11.2 percent in the second quarter to 9.1 percent, according to Cushman & Wakefield.
The average asking rent for Downtown office space increased more than $5 on average year over year to $36.18 a square foot in the third quarter; it was also up from $35.18 a foot in the second. For Class A space, such as that inside 7 World Trade Center, the average rent was $41.76 a foot, up from $40.23 the quarter before.
Office deals push Manhattan investment sales toward record year
Office building deals are spurring the Manhattan investment sales market toward a record year in 2006.
Sixty-two percent of the $14.3 billion in investment sales closed or put in contract in the first nine months of 2006 involved office properties, according to brokerage Cushman & Wakefield.
Last year, $12 billion in investment sales closed in the first nine months of the year on the way toward a record annual total of $20.9 billion.
Investors are taking advantage of strong office leasing fundamentals in putting their money into office properties, according to Joseph Harbert, head of Cushman & Wakefield’s New York area operations.
The Manhattan office vacancy rate was 7 percent by the end of the third quarter of 2006, according to Cushman & Wakefield, down from 7.8 percent in the second quarter and nearly 10 percent during the third quarter of 2005. Asking rents, at the same time, for office space have continued to rise, with the Manhattan overall rent averaging $45.85 a square foot by the end of the third quarter, up more than $4 from the average rent in the third quarter of last year.
While office building deals are fueling the record-setting 2006 investment sales market, investors are shunning the residential side. Residential properties accounted for 12.7 percent of the investment sales in Manhattan in the first nine months of 2006, down from 22.9 percent during the same period last year.