01/08/09

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Office market holding up, latest numbers show

It’s the start of a new year, and the Manhattan office market appears to be standing stoically in the face of predicted slips and falls.

Data show the Manhattan office leasing market has continued to tighten up, reaching down to its lowest vacancy rate in 25 years, according to Jeff Rosenblatt, executive managing director at Grubb & Ellis.

Dirk Hrobsky, senior vice president at CB Richard Ellis, said the most surprising part about the state of the market is “its seemingly sustainable nature in spite of big looming questions.”

The vacancy rate dropped to 4.6 percent in November, from 4.7 percent in October and 5.4 percent in November 2006, according to CB Richard Ellis’ monthly report.

And as of mid-December, Manhattan saw 31 leases of more than 100,000 square feet initiated or renewed, according to Jonathan Serko, executive vice president of Cushman & Wakefield. That’s down from 36 such big deals in 2006 – not much of a dip, considering the year’s jitters in the credit market.

Manhattan’s leasing activity increased to 1.91 million square feet in November, from 1.76 million square feet the month before, CBRE reported. Leasing activity was up 30 percent from 1.47 million square feet in November 2006.

But according to GVA Williams chair Bob Freedman, it is the spaces below 50,000 square feet that are leasing with the most velocity, but only because of a dearth in inventory of large contiguous spaces.

Freedman pointed to a lack of overhanging sublease space as testament to a soft landing in the near future. He said that historically, a significant volume of sublease space precedes a jump in overall vacancy. Sublease space only represents 2 percent of Midtown’s office space and 2.5 percent of Midtown South’s.

But many are still awaiting the impact of layoffs in the financial services sector, and predicting sublease space from those tenants coming on the market.

And layoffs at financial companies are bound to have a secondary effect in related industries, according to Rosenblatt, decreasing the labor and space demands at law firms and accounting firms they do business with.

“While [the impact of the credit crunch] has not yet been reflected in our research, it is making people skittish,” said Freedman. “Markets are about psychology, and the psychology of this market is clearly worse than the reality of the market.”

Average asking rent in the borough rose to $66.94, up from $66.12 in October, according to CBRE. The average rent was up 24 percent from $54.06 a year prior.

Experts are seeing the slowdown in rent increases as a gentle correction following the market’s impressive behavior in the past year.

Rosenblatt said that with flattening rents and sublease space coming on the market, “it’s going to get better for tenants – for the first time in about four years, that will be the case.” He said rents will probably remain flat for the next 12 to 18 months, but doubts they will drop substantially.

And although a near-term slowdown – and possibly even a decrease – in rents is widely predicted, many tenants are locking in on lease renewals well before their expiration, according to Rosenblatt.

“It’s surprising that people are locking in at such high numbers when they don’t have to,” he said, referring to tenants renewing two to four years before their leases expire. “They should at least wait and see; [tenants] are assuming that things are going to go up and up forever, and they never have.”

“The era of irrational exuberance is over,” said Freedman. “Everything is flattening out, because everything [was] rationalized, but I view that as a positive thing and not a negative.”


Midtown

Average rent continued to rise in Midtown, up to $84.08 per square foot in November, an increase of over $1 from $83.05 per square foot the previous month, CBRE reported. November’s average rent was up 25.6 percent from November 2006, when the average rent was $66.95 per square foot.

The vacancy rate stayed even from the prior month, at 4.1 percent, the report said. It was down slightly from 4.4 percent a year prior.

Midtown is the submarket most vulnerable to the woes of the credit market, analysts said, because its tenant base is the most concentrated in financial services.

“If you actually track it, you have more financial tenants in Midtown [than in the Financial District],” Freeman said. “And Downtwon has started to diversify its economic base.” Leasing activity fell 32 percent to 740,000 square feet in November, from 1.09 million square feet in October and 770,000 square feet in November 2006.


Midtown South

Leasing activity jumped 118 percent to 720,000 square feet in November from 330,000 square feet in October, according to CBRE. Leasing activity was 420,000 square feet in November 2006.

The vacancy rate in Midtown South was down to 4.9 percent, from 5.1 percent in October and 5.0 percent last November.

Average asking rent was $50.28 per square foot in November, up 42 cents from $49.86 per square foot in October, and up 24 percent from $40.51 in November 2006.


Downtown

Downtown’s vacancy rate continued to creep down, to 5.3 percent in November, from 5.6 percent in October and 8.1 percent in November 2006, CBRE reported.

Average asking rent in the submarket fell slightly to $46.53 per square foot, down from $46.72 per square foot one month earlier, but up from the $40.47 per square foot average a year earlier.

Leasing activity increased to 450,000 square feet in November, up 32 percent from 340,000 square feet in October, and up 61 percent from November 2006.