01/09/09

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Office leasing slows down

Source: CBRE

Commercial brokers are keeping a close watch on the next moves by tenants both large and small, trying to figure out how they will affect a Manhattan office market that has begun to lag.

Leasing activity in the early part of the year slowed from 2006, largely because tenants are hesitating to commit to new spaces with higher rents.

"As rents continue to increase, more companies will be looking for alternatives in Downtown, New Jersey and other markets," said Ken McCarthy, managing director of research at Cushman & Wakefield. "I don't see a decline in interest or activity but the increase in rents last year has made tenants more cautious."

According to CB Richard Ellis, overall asking rents were $56.63 per square foot in February, up 1.8 percent from $55.62 the previous month, an indication that while rents are still rising, they aren't surging as they did in 2006.

Midtown
There was more evidence the market has cooled since the end of last year, particularly a rising vacancy rate in Midtown, where empty space made up 4.4 percent of total available space in February, up from 4.0 percent in January.

"Last year, there was a rush to go out and make a deal. Now no one is rushing, there is a wait-and-see attitude," said Simon Wasserberger, senior vice president at CBRE.

Average rents rose 1.5 percent, from $68.97 per square foot in January to $69.99 per square foot in February. Midtown rents are still no bargain, and the situation isn't expected to change anytime soon.

According to Wasserberger, the number of commercial projects in development isn't substantially adding to inventory, causing rents to stay high.

"Whatever the activity level has been for the last month, the fundamentals of the market are still very strong, and very little has happened to change the supply side of the equation significantly," Wasserberger said.

Midtown South
Midtown South also saw vacancy rates edge up while rent levels remained solid.

February vacancy rates in Midtown South went up from 4.5 percent in January to 4.7 percent. Rents increased from $41.61 to $41.82 per square foot.

"The year started off slower than we did in 2006," said Robert Sammons, director of research at Colliers ABR.

"It's a tighter market now than it was last year. It's taking more time for tenants to find the right space," Sammons added. "There are fewer choices and the market is more expensive than it was this time last year."

Sammons said market activity will pick up and that price-sensitive tenants are shopping in the Midtown South Class B market, where many of the buildings underwent significant renovations in the dot-com boom. Major Class B submarkets including Hudson Square, the Flatiron District and Chelsea are expected to see the most activity as a result of tenants fleeing Midtown.

Downtown
Unlike Midtown and Midtown South, availability continued to tighten in the Downtown office market, which had a vacancy rate of 7.1 percent in February, down from 7.4 percent in January and 11.5 percent a year ago.

February saw an average rent of $42.44 per square foot, up 3.8 percent from $40.88 a square foot the previous month, and up 19.3 percent compared to $35.56 a year ago.

"The Downtown market has seen the greatest activity, especially in Financial East, where we have 7 World Trade Center," McCarthy said. "The new buildings are attracting the most interest and, as those deals happen, rates will continue to rise."

Companies are looking three or four years ahead of their lease expirations because there is a sense that the market will continue to see higher rents, McCarthy said.

"The deals that people made last year were [mostly] expiration driven," Wasserberger said. "So many deals were made last year -- the most active year -- that it shouldn't surprise us that a lot of business has been done."