11/21/08

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Office market still strong, no longer muscle-bound

Source: CBRE

Despite record-breaking rent numbers, leasing activity in Manhattan has slowed from the red-hot pace of last year.

"The last few years have been unbelievable years. The market is still very healthy, but it's not on pace to see the same amount of leasing as last year," said Ben Friedland, a senior vice president at CB Richard Ellis. "A lot of larger deals were done last year, and it added up to a lot of activity. You can't hit it out of the park year after year."

According to a report by Cushman & Wakefield, Manhattan's average commercial asking rent reached an all-time high during the first quarter, increasing 5.7 percent to $53.43 per square foot, up from $50.56 in the fourth quarter of 2006. The commercial firm also reported a new high in Midtown, where Class A space was going for $70.77 per square foot on average.

But according to a report by CBRE, overall leasing activity slowed 28 percent, to 1.42 million square feet in March from the 1.98 million square feet leased the prior month.

Overall vacancy in Manhattan tightened slightly in March to 5.0 percent from 5.1 percent in February. It was down from 6.5 percent a year ago, according to CBRE. Commercial market watchers said prices have increased steadily, but fewer deals are being inked. The square footage of the typical lease is now smaller, despite there being more tenants seeking space.

"We're seeing every type of industry out on the market: advertising, law firms, hedge funds and private equity firms," Friedland said. "Tenants are concerned that if they continue growing, they won't be able to handle the growth operationally."

Midtown
According to CBRE, there was no change in Midtown's vacancy rate, which remained at 4.4 percent, signaling a landlord's market.

Midtown's landlords are continuing to push up the asking price on Class A space. According to Matthew Astrachan, an executive vice president at Cushman & Wakefield, several buildings -- including the Seagram Building at 375 Park Avenue, the General Motors Building at 767 Fifth Avenue and the Solow Building at 9 West 57th Street -- are asking in the $150 per square foot price range.

Astrachan added that the new psychological ceiling for asking rents is $200 a square foot, though a deal hasn't yet been signed at that rate.

"There are enough transactions at $150, but $200 a foot we haven't seen," he said. "It's a pretty significant ceiling to break through, but you can't rule anything out."

While prices continue to rise rapidly in Midtown, Friedland said, leases fetching far upward of $150 a square foot are still rare.

With the exception of a few deals in the city's top buildings, only a handful of transactions have exceeded the $130 per square foot threshold, Friedland said. "The truly exceptional opportunities are still getting record numbers, but the B+ spaces priced as A spaces have been sitting," he noted.

Midtown South
According to CBRE, the overall vacancy rate in Midtown South tightened to 4.5 percent from 4.7 percent the previous month. The average asking rent climbed to $42.55 from $41.82 per square foot in February, a 1.7 percent change.

The Midtown South market remained one of the tightest in the nation, with numerous creative companies seeking space.

Downtown
Downtown's vacancy rate continued to drop in March, reaching 6.8 percent from 7.1 percent in February. The vacancy rate is approaching half of the 11.2 percent level it was at this time a year ago, according to CBRE.

Average rents Downtown rose slightly, up 0.8 percent to $42.76 from $42.44 per square foot in February.

Although much has been made of the potential migration of tenants from Midtown to Downtown because of cheaper rents, only about 15 percent of new Downtown leases had been signed to Midtown firms earlier this year, according to data from Studley.

Astrachan said that close to 40 tenants are now looking for more than 100,000 square feet in Midtown.

"It's a pretty big number historically and a pretty healthy number of folks," he said. "But where they currently are and where they end up remains to be determined; not all of them will remain in Midtown, and some may go Downtown."