12/01/08

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Cheap digs help office market

In the face of an anticipated slowdown across the office market, Midtown's Class B leasing activity soared in the first five months of 2008, more than double the amount during the same period a year ago.

A possible explanation for this phenomenon is that rampant rent growth over the past few years has forced tenants whose lease terms are ending to seek cheaper space rather than renew, according to Mark Mandell, executive director at Cushman & Wakefield. This helps out the Class B office market.

"There are a good amount of tenants who are seeing some sticker shock when their leases come up," Mandell said.

A Cushman & Wakefield report showed a 101 percent jump in Class B leasing activity in Midtown in the first five months of 2008 compared to the first five months of 2007, while Class A office space there saw a slight drop of 6.9 percent between the same two time periods.

Erik Schmall, senior managing director at Studley, said he believes Midtown will see the most leasing activity in general in coming months, as it has the most sublease space likely to become available, after hard-hit financial service tenants vacate their offices.

Midtown's sublease space was up 28 percent in May compared to last year, according to Cushman statistics cited by Mandell. He said that Downtown's sublease space was up 61 percent over that same period. While this leap is largely skewed by Goldman Sachs' move to its new tower, it still points to a part of the market that is likely to see some vacancy increases coming.

The Manhattan vacancy rate was 5.6 percent in May, up 10 basis points from 5.5 percent in April. It was up 1.2 percent from 4.4 percent one year earlier.

Manhattan leasing activity was up in May to 1.69 million square feet, a 13.4 percent gain from 1.46 million square feet in April, according to a monthly report from CB Richard Ellis. Many brokers believe this is because specific niches of the market continue to perform very well, despite the market's general sluggishness.

The city's average asking rent also continued to rise, up 44 cents to $72.81 per square foot in May, from $72.37 per square foot in April. The average rent was $61.52 per square foot in May 2007.

"I don't see a lot of landlords that are ready to give up their bargaining power, at least not yet," said David Hoffman, Jr., executive managing director and principal at Colliers ABR, with respect to negotiations between landlords and tenants.

Hoffman says he thinks the market is in "a state of suspended animation" that is just waiting for now, but likely to see significant changes to tenants' advantage as soon as a number of large blocks of sublease space hit the market.

Midtown

Midtown's leasing activity saw a small, 2.7 percent increase to 1.16 million square feet in May, from 1.13 square feet one month earlier. Leasing activity was down year over year, from 1.33 million square feet last May.

The vacancy rate there increased 10 basis points to 4.9 percent in May from the month before. It was up 90 basis points from 4.0 percent in May 2007.

The average asking rent in Midtown rose 74 cents to $86.52 per square foot in May, from $85.78 the previous month. The average rent was up from $76.85 per square foot one year earlier.

Midtown South

The leasing activity in Midtown South was up 76.2 percent to 370,000 square feet in May, from 210,000 square feet the month before. The vacancy rate there was 6.8 percent in May, up 50 basis points from 6.3 percent in April, and up from 3.9 percent in May 2007.

The average asking rent in the market was $52.87 per square foot, down 48 cents from $53.35 per square foot in April. Midtown South's average asking rent was $44.84 per square foot in May 2007.

Downtown

The leasing activity in Downtown was up 33.3 percent to 160,000 square feet in May, from 120,000 square feet in April, CBRE reported. The market's vacancy rate rose 10 basis points to 6.8 percent in May from the month before. This is 70 basis points higher than May 2007, when there was a 6.1 percent vacancy rate.

The average asking rent in Downtown was $49.70 per square foot in May, up 27 cents from $49.43 per square foot the previous month. This is up by $3.90 from $45.80 per square foot one year earlier.