11/21/08

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Midtown office rents drop

The Manhattan office leasing market as a whole remained fairly static between December 2007 and January 2008, according to CB Richard Ellis's latest monthly market report, although a drop in asking rents in Midtown could be the first glimpse of larger troubles to come.

Leasing activity in the borough was almost unmoved in January, down 30,000 square feet from the previous month to 2.2 million square feet. That was up 41 percent from 1.56 million square feet leased in January 2007, the report said.

Expected layoffs in the financial services industry, which would decrease demand for space and impact the market as a whole, have not yet been realized, brokers say. In light of these predictions, however, some more cautious landlords are anxious to make deals, which has given tenants more bargaining power.

"There are some landlords that are not as confident as others," said Mitchell Arkin, executive director at Cushman & Wakefield. "They are getting nervous and may offer higher concessions and undercut the market."

The average asking rent in Manhattan was $68.61 per square foot in January, up 15 cents from the month before, according to CBRE's report. This marks a noticeable slowdown from the $1.52 jump between November and December, and the 82 cent rise from October to November.

This may be the first sign of a predicted slowdown — and possibly even a turnaround — in asking rents, according to brokers. Average asking rent could decrease by as much as 5 to 7 percent in 2008, according to Peter Kozel, executive managing director of research at Newmark Knight Frank.

Still, the average asking rent was around $1.50 higher than the average of $66.94 per square foot in January 2007, according to CBRE.

Manhattan's vacancy rate also stood still in January, at 4.8 percent, the same figure as for December 2007, CBRE data indicate. The brokerage cautioned that its recent restructuring of submarket boundaries could affect direct comparison between January statistics and other months.

In addition to a predicted decline in asking rents, analysts tend to stick by previous predictions that space will open up this year. Kozel said he expects Manhattan's vacancy rate to increase to around 7 percent by the end of 2008, from Newmark Knight Frank's current estimate of 5 percent.

Some experts believe that an increase in available indirect space will be more influential in giving tenants bargaining power than the less substantial increase in direct space expected to come on the market.

"The problem is how much sublet space is going to compete with direct space, and we saw that happen in 2001 at the end of the tech boom," Arkin said.

However, so far there hasn't been a jump in sublease space, according to Kozel. He says that "so far this has had the impact of minimizing the pressure to reduce direct asking rents."


Midtown

The average asking rent in Midtown fell by $1.16 to $83.92 per square foot in January, CBRE's data showed. Average asking rent was still 24.5 percent higher than $67.40 per square foot in January 2007.
Note: Correction appended.

While Midtown was the only of Manhattan's three submarkets to experience a fall in asking rents in January, certain pockets of it — including Times Square and Penn Station — are seeing improvement, says Pamela Murphy, vice president at CBRE.

Average asking rents in those two areas have reached $79.95 and $56.39 per square foot respectively, she said.

Midtown's leasing activity jumped 41.6 percent from December to 1.77 million square feet in January, according to CBRE. Year over year, leasing activity increased 70 percent from 1.04 million square feet in January 2007.

The vacancy rate in Midtown increased slightly to 4.5 percent in January from 4.4 percent the month before, CBRE's statistics showed.


Midtown South

Leasing activity in Midtown South fell by half to 210,000 square feet in January, from 430,000 square feet in December, according to CBRE. It was also down from 280,000 square feet in January 2007.

Midtown South's vacancy rate increased by 60 basis points to 6 percent in January, from 5.4 percent in December, the report said.

The average asking rent rose to $51.17 per square foot in Midtown South in January, up 62 cents from $50.55 per square foot the previous month.


Downtown

Downtown's vacancy rate continued to decrease in January, falling to 4.9 percent from 5.6 percent in December, according to CBRE.

Downtown's availability rate was below Midtown's for the first time December and is poised to continue declining, Murphy said.

Leasing activity was down 58 percent in January from the month before, to 230,000 square feet, CBRE's report said. It was about even with the 240,000 square feet leased in January 2007.

The average asking rent increased 38 cents to $47.64 per square foot in January compared to the month before. The average asking rent was up 16.5 percent compared to January 2007, when it was $40.88 per square foot.