12/03/08

• Home

• The Magazine

• Archives

• Webcasts

• Advertising

• Job Board

• South Florida

• Subscribe

Rents hitting highs in Manhattan office space squeeze

Asking rents in the Manhattan office market keep going up, prompting the obvious question: How high can they go? The answer depends on several variables, of course, but one thing is clear: Office space, especially on the higher end, is disappearing in Manhattan, and there's not much more of it being built.

And this pressure, along with a decline in office sublease space, a generally strong job market, and residential conversions of lower-end offices, helped drive average commercial asking rents in the borough upward in the first quarter of 2006, in some cases to their highest points in years.

The overall average asking rent for commercial space in the first quarter was $43.20 a square foot, according to brokerage Cushman & Wakefield, the highest since late 2002, and nearly $3 above the average at the end of 2005.

Also, more tenants than ever were willing to pay a premium rent well more than twice that average: Fifteen commercial leases were signed at asking rents of more than $100 a square foot in the first quarter, Cushman & Wakefield reported; in the last three years combined, only 24 such leases were signed.

"Most of us as real estate professionals would not have told you there'd be that many deals [in the first quarter]," Joe Harbert, COO for the Cushman & Wakefield New York metro region, said of the high-priced leases.

This wave of higher rents, however, had been rushing toward its crest for a while. In 2003, eight leases of at least $70 a square foot were inked, according to Cushman & Wakefield; in 2004, that number was 48; and, last year, there were 92 leases where rents were at least $70 a foot. In the first quarter alone this year, there were 33.

Regardless of the higher rents, tenants continued to gobble space in the first quarter, particularly larger spaces in Midtown and Midtown South, as the city's unemployment rate sank to its lowest point in five years in February.

The overall vacancy rate for the borough stayed steady at 8.4 percent from the end of 2005 through to April.

Midtown
Midtown's shrinking inventory, particularly of large blocks of office space, helped drive up the overall asking rent there to its highest point in nearly four years, $49.71 a foot.

There were only nine blocks of Manhattan office space bigger than 200,000 square feet available in mid-April. More than half were Downtown, meaning there were few such spaces in Midtown.

But the scarcity of higher-end space could eventually keep average rents from spiraling ever upward, market observers say. With the economy expected to stay strong and affluent tenants like hedge funds vying for the dwindling amount of higher-end space, landlords eventually won't have as much of it to rent, which will limit the amount the average rises. However, the conversion to housing of lower-rent Class B and C space could still push average rents upward.

The vacancy rate for Class A space in Midtown in the first quarter was 5.8 percent, nearly the same as the 5.6 percent at the end of 2005. Midtown's overall vacancy rate was 7.8 percent in the first quarter, the same as the quarter before.

The average asking rent for Class A space in Midtown was $55.30, the highest level since the third quarter of 2002.

Midtown South
Midtown South by April had the nation's lowest overall commercial vacancy rate at 6.2 percent, according to Cushman & Wakefield, less than half what it was at the start of the decade. It also dipped from 7.4 percent at the end of last year.

The overall asking rent went up more than $1, on average, during the first quarter from the end of 2005 to $34.70 a foot. And the average asking rent for Class B space, the dominant type of space in the submarket, hit $35.45 a foot, up from $35.31 the previous quarter.

Leases in oft-maligned Hudson Square accounted for 31 percent of Midtown South's leasing activity in the first quarter, according to Cushman & Wakefield, with 258,400 square feet in deals closed. Just last fall, Hudson Square had the highest vacancy rate of any major commercial area in Manhattan -- nearly 21 percent, according to brokerage Colliers ABR.

The biggest Hudson Square deal so far this year has been New York Public Radio's 71,900-square-foot lease at 160-170 Varick Street, which helped drive the area's vacancy rate from around 16 percent at the end of 2005 to 13.9 percent by April. (This figure also includes the West Village submarket.)

Downtown
The average asking rent for office space Downtown increased $4 from the fourth quarter 2005 through the first of 2006, to $35 a foot, spurred mostly by the rents in the recently completed 7 World Trade Center. There, asking rents are more than $45 a foot, generally.

The 1.7-million-square-foot tower, which has only a handful of tenants so far, also contributed to a first quarter rise in Downtown's overall vacancy rate. That went up from 10.6 percent at the end of last year to 11.6 percent. Still, this rate remains well below the approximately 14 percent vacancy seen toward the end of 2004, suggesting that even in Manhattan's weakest submarket, "weakest" is a relative term.

Taken as its own commercial business district, in fact, Downtown had a lower vacancy rate in the first quarter than many other cities, Cushman & Wakefield reported, such as Boston (12.9 percent) and Oakland (12.6 percent).