12/01/08

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Winter's office market chill

Source: C&W; Dec. values are for entire Q4 2006

The commercial market is shifting gears. Though vacancy rates continued to drop in Manhattan overall, rents fell and leasing activity was slower in January.

According to a market report by commercial brokerage CB Richard Ellis, January resulted in 1.56 million square feet leased overall, down from 2.73 million square feet in December and from 2.20 million square feet last January.

"The market is steady, but there may be a slower decline in availability rates going forward," said Gregory Tosko, vice chairman of CB Richard Ellis.

Manhattan's vacancy was 6.0 percent in January, down from 6.7 percent for the quarter that ended in December, according to a market report by Cushman & Wakefield.

Overall, asking rents in Manhattan dipped 2.2 percent from $50.56 at the end of 2006 to $49.45 in January, pulled down by a 2.6 percent decline in Midtown.

Limited availability of large blocks of contiguous space continued to drive some tenants out of Manhattan.

"So far, we've seen the Manhattan vacancy rate stabilized but the total vacancy will continue to drop," said Barry Zeller, executive director at Cushman & Wakefield's Midtown office.

Midtown
In Midtown, the vacancy rate continued to tighten while average asking rents dropped.

According to Cushman & Wakefield, Midtown had a 5.4 percent vacancy rate in January, down from 6.4 percent for the quarter that ended in December. For January, the average asking rate was a reported $57.39, down from $58.92 in the final quarter of 2006.

Still, there were plenty of buildings with sky-high rents.

"Some premium buildings are holding out on their last blocks of space for prices north of $125," Tosko said. "For that tenant demographic, rent isn't nearly as big a portion of their gross revenue as long as they feel like they're getting a fair deal."

Marathon Asset Management last month leased two floors at One Bryant Park, reaffirming the market for high-end office space with rates above $125. Class A office space in Midtown had an average rate of $65.71 and reached as high as an average of $89.38 in the Madison Avenue/Fifth Avenue submarket, according to Cushman & Wakefield.

According to Zeller, as the vacancy rate continues to tighten, tenants who need large blocks of space must set up corporate campuses in Midtown (see Lack of large spaces leads to more office campuses).

The investment bank Bear Stearns is one of several companies that have put workers in different buildings. The financial services firm took more than 100,000 additional square feet at 237 Park Avenue, one of their two Park Avenue locations.

Financial service firms are leading the demand for expansion space amid a healthy Wall Street climate, Tosko said.

Midtown South
To ensure that they have room to expand, Estee Lauder's MAC Cosmetics last month leased the remainder of 25,000 square feet at 130 Prince Street -- office space that won't be vacant in the near term. CBRE defines Soho as a part of Midtown South.

"There is not a lot of product [available], no large buildings, not much turnover and mostly old buildings," Tosko said. "Pricing for good product is in excess of $50 a square foot, and tenants who run the risk of no space are signing forward commitments as far ahead as the third quarter of 2008."

Creative firms like MAC Cosmetics prefer to be in Midtown South despite the tightened vacancy and rising rents, said Tosko. "Creative firms are really benefiting parts of Midtown South," he said.

According to Cushman & Wakefield, the vacancy rate in Midtown South was 4.9 percent in January, down from 5.6 percent for the quarter that ended in December. The average rent rate increased slightly to $40.99 from $40.55.

Downtown
In Downtown, the vacancy rate dropped to 8.2 percent in January, down from 8.4 percent for 2006's final quarter. Average rent rates continue to rise steadily, up to $39.11 from $38.62.

"There is some pressure on pricing -- it's moving along constantly upward. But this is not a market where three tenants are going after a single block of space," Tosko said.

While market insiders say Downtown activity has substantially picked up in the past year, it will be a while before the market sees the same demand as Midtown.