12/01/08

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Higher rents dampen deals in Manhattan office market

Midtown rents shot up by another $3 a square foot at the mid-year mark, while higher rents throughout Manhattan scared off tenants looking for space.

The end result: fewer deals. According to commercial brokerage CB Richard Ellis, leasing activity was off by 26 percent in June compared to the same time last year, but industry insiders said there is still strong demand.

"Overall, Manhattan continues to be a healthy market," said Travis Yuengst, head of research at CBRE. "Asking rates continue to appreciate, and supply is diminishing, with very little new supply coming on."

Average asking rates for Manhattan increased 3.3 percent to $63.56 a square foot in June from the prior month. Since the second quarter of 2006, rates have increased an incredible 34.4 percent.

However, the vacancy rate remained flat at 4.4 percent, compared with the previous month, according to CBRE, and fell 1.9 percent since the year-ago quarter.

"Leasing activity is down a little because tenants are holding out for deals," said Dirk Hrobsky, senior vice president at CBRE. "As long as the economy stays as strong as it is and rates are relatively low, demand will continue to drive up rents."

"There is a constricted supply of space, with no new speculative space over the next 12 to 18 months," he added.


Midtown

In Midtown, leasing activity was down to 1.25 million square feet in June, a 6 percent drop from the prior month. The average asking rent increased to $79.85 a square foot from $76.85 in the prior month. Midtown's vacancy rate of 3.9 percent in June was down from 4.0 percent the previous month.

"Every month we're breaking our own records for rents in Midtown," Yuengst said.

While Manhattan tenants are experiencing sticker shock, international clients are making deals in Midtown, said Yuengst.

A few London private equity firms have recently signed leases in Midtown. Lion Capital took space at 888 Seventh Avenue, and CVC Capital Partners signed a deal for space at 712 Fifth Avenue during the first quarter.

"London's office market is trading so much higher," he added. "These tenants come into Midtown, where they're paying $140 -- top dollar -- and it's a bargain compared to London prices."

Some Midtown tenants are moving back operations out of Manhattan, says Robert Sammons, director of research at Colliers ABR. BNP Paribas, with space at 787 Seventh Avenue and 919 Third Avenue, recently took 100,000 square feet in Jersey City. "It's been a long time since tenants were looking at Jersey City again, but we're certainly going to see that continue -- in Westchester and Fairfield [counties] as well."


Midtown South

June was also a slow month for leasing deals in Midtown South. Despite the movement of media firms to Hudson Square, leasing activity was down 62 percent from the prior month to 310,000 square feet in June. The average asking rent for Midtown South increased 2.1 percent to $45.79 a square foot in June.

"Hudson Square rents went up $3 in one month," Yuengst said. "Owners are realizing it's a hot market for media communications and are benchmarking their rents."

Midtown South's vacancy rate of 3.9 percent did not change from May to June.

"Midtown South rent rates are neck and neck with last year, and Downtown is noticeably better," Yuengst said. "It's a sign the Midtown demand spillover is still affecting Downtown and Midtown South."


Downtown

It was an unusually slow month Downtown, with 250,000 square feet of leasing activity, down 39 percent from May. The average asking rent for Downtown was $46.79 a square foot, up 2.2 percent from the previous month.

"Everyone knows that Downtown is certainly back from Sept. 11," said Frank Cento, executive director at Cushman & Wakefield. "I'm amazed how dramatically the market has turned."

A spread of $25 per square foot between Midtown and Downtown's average asking rents is appealing to Midtown tenants looking Downtown, said Cento.

"Midtown tenants are also enticed by the tax abatements for corporations Downtown, and leasing concessions that have since been reduced in Midtown," he added. "These three factors are driving the momentum in Downtown."

Brokers say another force in the Downtown office market is the number of deals done for small office spaces. According to Cushman & Wakefield, 66 percent of leasing activity was for 25,000 square feet or less, and there were no deals made for space over 100,000 square feet in the past six months.

"It says something positive about the tenant downtown," Cento said. "Clients aren't taking space for back office functions. Midtown tenants are coming down for their front offices."

The vacancy rate for Downtown was marginally tighter, now at 6.0 percent from 6.1 percent in May.

According to Cento, Downtown vacancy could be at 5 percent by the end of the year, with a $4 to $5 per square foot rent spike.

"People would go downtown for value, but now there are no deals under $35 per square foot," Cento said. "Landlords who feel comfortable with the market don't need to lower their prices. Instead they're raising them to be ahead of the curve."