12/02/08

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For commercial market, new twists in an old story

As the commercial real estate market in Manhattan eases toward 2006, the year that 7 World Trade Center will open its doors, Midtown remains dominant, Downtown struggles toward recovery, and Midtown South exits as a sleeper market ripe with increasingly expensive Class B space.

Sound familiar? It should: It's basically the same scenario as 2004 bled into 2005.

Changes, though, are already under way that could alter the plot. For one, large blocks of available Class A commercial space continue to dwindle throughout Manhattan, particularly in Midtown, according to third quarter reports. For another, Goldman Sachs' new 2.1-million-square-foot headquarters on the last commercial parcel in Battery Park City should be under construction next year.

For now, the old plotline holds. Manhattan recorded an overall commercial vacancy rate for the third quarter of 9.6 percent, according to a report by Cushman & Wakefield, down from both 9.8 percent in the second quarter and from 11.4 percent in the third quarter of 2004.

Midtown
The overall vacancy rate for Midtown in the third quarter was 9.3 percent, a 0.1 percentage point increase over the second quarter. Most of this slight increase was due to new direct space in the Grand Central submarket and a lull in leasing activity.

The largest deal of the quarter in Manhattan was in Midtown Citigroup in September leased 270,311 square feet at 787 Seventh Avenue.

But, with 13.1 million square feet leased in Midtown in 2005 through Sept. 30, according to Cushman & Wakefield, the area's leasing activity was 9 percent lower than during the first nine months of 2004. For Class A space like that in 787 Seventh Avenue, the vacancy rate was under 10 percent for the third straight quarter.

The overall average asking rent for Midtown was $48.06 per square foot up more than $1, on average, from the third quarter 2004. Average asking rent for Class A space was just under $53 a square foot.

Perhaps the biggest shift in Midtown as the third quarter ended was the paucity of spaces over 200,000 square feet. At the start of 2005, according to Cushman & Wakefield, 23 Class A spaces greater than 200,000 square feet were on the market in Midtown; by the end of September, only 10 remained. This could mean changes for Downtown in 2006.

"As blocks of huge commercial space dwindle in Midtown and Midtown South," said Cushman & Wakefield COO Joseph Harbert, "companies may have to go Downtown."

Midtown South
In Midtown South, an area dominated by Class B space, only one Class A space above 200,000 square feet remained by the end of September. Not surprising, considering the area, said Ken Krasnow, managing partner and head of Cushman & Wakefield's New York offices. He called Midtown South "the healthiest market in all of Manhattan."

Midtown South had some of its lowest vacancy rates and highest average asking rents in years during the summer.

The vacancy rate for the third quarter was its lowest since mid-2001 down to 8.1 percent from 9 percent in the second quarter and from 11.2 percent at the same time last year. The Class B rate was 9 percent for the third quarter, according to Cushman & Wakefield. The average asking rents for Midtown South increased nearly $3 a square foot from the third quarter of 2004, to $33.58 the highest level in three years.

The Madison Square Park-Union Square submarket led the leasing activity in Midtown South through the end of September, Cushman & Wakefield reported, accounting for 52 percent of the 3.2 million square feet leased in the area.

Downtown
The Downtown vacancy rate for the third quarter was 11.5 percent, according to Cushman & Wakefield, a slight decrease from the second quarter and from the same time period in 2004. Reports by other brokerages put the vacancy rate higher and all generally reported that it dropped. (Asking rents, too, dropped, from $31.20 in the second quarter to $31.09 in the third.)

Richard Persichetti, senior research analyst at Grubb & Ellis, put the vacancy rate at 13 percent down from the second quarter, but above the same period in 2004 meaning Downtown has a ways to go.

"Until it declines under 13 percent," he said, "I can't really say Downtown has recovered yet."