12/02/08

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North-South office split widens

The gulf between the revived Midtown and laggard Downtown leasing markets widened in November, though brokers said 2005 will see the gap closing as part of an overall pickup in activity.

Manhattan vacancy rates remained steady at 10.6 percent in November, rising only slightly from the October rate of 10.5 percent, according to monthly figures complied by Grubb & Ellis. Despite the nominal rise, vacancy rates remain near a two-year low that promises to shrink as Midtown inventory decreases, the company said.

Citing a lack of new construction in Midtown, market observers said expansion by financial services firms heralds a bullish outlook. "If the economy continues to improve, demand could catch up with supply over the next two years," the Grubb & Ellis report said.

While observers believe that companies that are priced out by rising Midtown rates will head Downtown, Anthony Westreich, chief executive of Monday Properties, said any improvement is predicated on an overall improvement in the economy.

"The fundamental principle of real estate is based upon occupancy, and you won't achieve occupancy and rental rates without job growth," he said.

Kevin Danehy, executive vice president and senior managing director at CB Richard Ellis, said November results again showed "a tale of two cities."

"The Downtown commercial marketplace is flat or increasing marginally and won't likely experience the same recovery that Midtown has had until all the large blocks of space in Midtown are gone," he said.

Midtown

Midtown class A space remains a much sought commodity, said Robert Sammons, research director at Colliers ABR, which reported a November vacancy rate of 9.1 percent, down from 9.3 percent the previous month.

"It's certainly moving in the right direction," he said. "What we're going to see going into January is more and more deals being closed. The financial services firms are trying to lock in deals before the market goes through the roof again."

A look at the largest transactions of November bears out Sammons analysis. GE Capital Corp. signed a lease on 132,955 square feet at 299 Park Ave. and Citicorp notched the second-largest deal of the month, taking 126,000 square feet at 787 Seventh Ave., according to Grubb & Ellis.

Midtown South

Midtown South saw its overall vacancy rate hold at 11.6 percent for the second month in a row while its average asking rent jumped to $31.10 per square foot from $30.09 per square foot the month before.

Newmark Global Real Estate Advisors had reported that rents climbed above $30 a square foot for the first time since December 2002.

In the district's largest transaction, the law of firm Milberg Weiss Bershad Hynes & Lerach renewed a lease of 100,467 square feet at One Penn Plaza, according to Grubb & Ellis.

Downtown

Already buffeted by the arrival of large blocks of space in October, Downtown's numbers will look worse before they get better, as 2.7 million square feet of space at the new 7 World Trade Center will be added to the inventory in the near future.

CB Richard Ellis reported that the vacancy rate climbed to 15.8 percent in November from 15.3 percent in October, despite average asking rents of $30.15 a square foot. Midtown asking rates averaged $50.29 a square foot, the company reported.

"Without significant leasing activity in December, the Downtown market's availability rate could hit a nine-year high," Newmark reported.

Colliers ABR found class A space heading in a slightly positive direction, however, with the vacancy rate dropping to 14.4 percent from 14.5 percent reported the month before.

Brokers said lack of supply to the north should eventually spur more demand Downtown. "I expect that by the first quarter of 2005, all large blocks of space in Midtown will be committed if not leased," said Danehy.

"We are also starting to see evidence that Downtown is becoming a much more balanced environment as educational institutions are starting to look there as a place to expand campuses or establish branches," he said.

In the largest Downtown transaction of November, the law firm of Studley, McKee Nelson leased 67,000 square feet at One Battery Park Plaza.