11/20/08

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Commercial vacancy rates nosedive to new lows

Source: Colliers ABR

Vacancy rates plunged and rents soared in the last month of 2006, capping off a record year for commercial real estate in the city.

According to numbers from brokerage Colliers ABR, the vacancy rate for Class A properties shrank to just 6.0 percent -- down from 6.5 percent in November and from 7.4 percent a year ago -- as tenants continued their quest to rent every nook and cranny in the major office districts.

It comes as no surprise that the sharp drop in vacancy rates in December was accompanied by another spike in rents. The average Class A asking rent for Manhattan closed 2006 at $68.29 a foot, up 2.5 percent from $66.65 a foot in November, even despite a lack of premium space on the market.

"The downside to this boom is that there is precious little space available and little new inventory coming onto the market," said Robert Sammons, director of research for Colliers. "As a result, we've seen firms looking for space in buildings and neighborhoods that they wouldn't have considered before. For instance, you have Midtown firms looking Downtown, where they never would have looked before, or looking in Midtown South."

Hidrock Realty president Abraham Hidary has also noticed an increased flexibility among tenants, but says most are trying to stay in their traditional neighborhoods.

"Most businesses, particularly smaller businesses in Midtown that occupy between 5,000 and 10,000 square feet of space, feel they need to stay in the neighborhoods where they are, and if they haven't signed a lease in a while, they're in for some sticker shock," Hidary said. "But for the most part, [firms] either come up with the money to stay in their space or they take space on side streets instead of on the avenues."

Midtown
Vacancy rates in Midtown plummeted again in December. Vacancy in Class A buildings fell three-tenths of a percent to 5.6 percent. The overall vacancy rate shrank from 6.8 percent to 6.5 percent.

Average asking rents for Class A space ticked up again to $79.57, a rise of 2.8 percent from November and up a total of 33.4 percent for the year. As always, rents were highest in the Plaza District submarket, where asking rents now average $89.16 a foot. Despite the low vacancy rate and the lack of large, premium spaces, firms continued to seek places in Midtown.

"From the tenants' standpoint, it's a very difficult environment," said Andrew Sachs, senior director at real estate services firm Cushman & Wakefield. "Tenants realize now that they might not be able to expand on the same floor, or the same elevator bank, or even in the same building, but they want to stay close to home."

A willingness among tenants to split services between buildings helped lead to a decline in Class B vacancy rates, which fell to 9.1 percent in December, down from 9.3 percent in November.

Midtown South
Midtown South continued to improve in December. Though Colliers' numbers indicate that the vacancy rate for Class A buildings remained steady at 5.9 percent, the overall vacancy rate dropped from 7.9 percent in November to 7.6 percent in December. Rents remained nearly flat overall in the district, with December asking rents down a penny a square foot from the preceding month, to $37.86. Recovery in Midtown South as a whole has been hobbled by the Hudson Square submarket and its 23.1 percent vacancy rate.

Downtown
Vacancy rates for Class A space fell sharply Downtown, from 8.2 percent in November to 7.1 percent in December, helped by ABN Amro's 140,000-square-foot lease at 7 World Trade Center and the Administration for Children's Services' 470,000-square-foot renewal and expansion at 150 William Street. Rents for premium space ticked down to $48.43 from $48.96 in November but were still up -- impressively -- from $33.76 in December 2005. The astounding 43 percent jump in Class A rents on the year is mostly due to the completion of 7 World Trade Center and subsequent leases there.

Forecast
After 2006 saw vacancy rates tumble 1.4 percent borough-wide to 6.0 percent and the average asking rent for Class A space soar an astounding 34.8 percent to $68.29, many predicted the market would cool significantly in 2007. Not so, according to Sammons.

"We figured things would start to slow down in 2007, but we've revised that forecast after speaking to several economists," Sammons said. "Everyone seems to want space and wants to add employees. So long as people want to add employees and grow their businesses, we expect the strong market to continue, at least into the second quarter of 2007. The spike in rents won't be as dramatic as it was last year, but rents will rise."


Major companies waiting it out

Across Manhattan, rents are up dramatically and vacancy rates for premium spaces are down. But the hot market hasn't driven big companies to seek refuge in nearby office markets such as Westchester and Fairfield counties or in Jersey City, brokers say.

"It's really amazing, actually," said Robert Sammons, director of research for Colliers ABR. "You'd figure with the market being where it is that there'd at least be a few companies moving their back-end employees out of the city, but so far it hasn't happened."

Industry observers credit the city's strong economy, intellectual capital and quality of life for keeping firms in place despite the high rents.

In an interesting reversal of the forecasted trend, MetLife officially signed off on a deal for 410,000 square feet at 1095 Avenue of the Americas in December to relocate several thousand employees who were operating out of offices in Long Island City in Queens.

"Basically, firms stay here because the best employees live here and want to work here," said Laurence Briody, senior vice president at CB Richard Ellis. "If the economy weakens and profits disappear, you may see some firms looking to cut their bottom line, and real estate costs might be one way they do that. For now, I haven't heard any rumblings about people wanting to move out of town."