Manhattan Office Vacancy Registers First Quarterly Drop For First Time in Three Years
7 Jul, 2010, New York
Cushman & Wakefield today released first quarter statistics for the Manhattan commercial real estate market that show the vacancy rate declined to 10.8 percent in June from 11.6 percent at the end of March.
The decline in vacancy, the first quarterly vacancy rate decline since the second quarter of 2007, coincides with the strongest quarter for new leasing activity in Manhattan since the third quarter of 2006. For the second quarter, 6.9 million square feet of new office leases were signed, bringing the midyear total to 12.6 million square feet, up 98 percent year over year.
The Manhattan class-A vacancy rate declined to 11.5 percent in June from 12.6 percent at the end of the first quarter. For the same time period, the overall Midtown Manhattan vacancy rate (including all property classes), declined to 11.5 percent from 12.6 percent; the Midtown South vacancy rate declined to 9.3 percent from 9.9 percent and the Downtown vacancy rate declined to 9.9 percent from 10.0 percent.
"The amount of new leasing activity during the second quarter shows how far the market has come from this time last year," said Joseph R. Harbert, Cushman & Wakefield's Chief Operating Officer for the New York Metro Region. "With this kind of impact on vacancy, there is little doubt that the market is improving."
Midtown's class-A vacancy, which rose to a high of 13.9 percent at the end of the first quarter of 2010, declined to 12.5 percent at the end of June.
"In Midtown, the market has clearly trended from stabilization to recovery over the past six months," said Ken McCarthy, Cushman & Wakefield's Managing Director of Research for the New York Metro Region.
Mr. McCarthy suggested that the market would experience some swings in vacancy near-term, as Cushman & Wakefield expects certain space to be added to the market before year end, but he asserted that key economic indicators, such as employment, are indicative of a longer-term trend of slowly improving office market fundamentals.
"There are still some uncertainties in the broader global economy that have the ability to derail a recovery, but in New York City five straight months of employment growth suggest business confidence has started to return and the office market stands to benefit."
In addition to the overall vacancy rate decline in June, the sublease vacancy rate - which represents space available directly from tenants with excess inventory - declined to 2.4 percent from 2.6 percent at the end of the first quarter. Sublease space now accounts for only 21.9 percent of all available office space in Manhattan, down from a peak of 28.2 percent in April 2009.
At the end of June, overall average asking rents in Manhattan registered $54.31, down from $55.38 at the end of the first quarter.
The top five leases of the quarter included a 380,000 square foot renewal and expansion for Jones Apparel Group at 1411 Broadway, a 378,304 square foot new lease for Proskauer Rose at 11 Times Square, a 352,000 square foot renewal for Willkie Farr & Gallagher at 787 Seventh Ave., a 280,762 square foot new lease for Local Union 32BJ at 620 Avenue of the Americas and a 260,994 square foot new lease for Tiffany at 200 Fifth Ave.
By industry, financial services accounted for 22.6 percent of all leasing year to date, followed by legal services at 12.1 percent and government, education and social services at 11.9 percent. This compares to the full year 2009, when financial services accounted for 29.0 percent of leasing, followed by legal services at 15.5 percent, and government, education and social services at 11.9 percent.
Property sales closed and under contract for transactions $10 million and higher totaled $5.8 billion at midyear 2010, up 132 percent from the $2.5 billion closed and under contract at midyear 2009. Activity was up 75 percent from the $3.3 billion closed and under contract at the end of the first quarter of 2010.
Approximately $5 billion in sales closed during the first half of 2010. If sales volume for the second half of the year reflect that of the first half, as expected, overall property sales for 2010 will be off 64 percent from the 2004-to-2008 five year average of $28 billion.
However, with $3.5 billion in transactions completed in 2009, 2010 investment sales volume has already surpassed last year's total.
"With limited supply and pent-up demand, we've seen aggressive pricing for transactions that have closed in the first half of 2010," said Mr. Harbert.
According to Mr. Harbert, with leasing fundamentals beginning to improve, it is likely investment sales volume should remain steady or increase into the second half of the year.
Manhattan's retail market experienced a surge in activity and city-wide decrease in availability during the second quarter of 2010. Of the seven retail submarkets tracked by Cushman & Wakefield Retail Services, availability declined in five, while availability in the remaining two was stable.
"Retailers are in a managed expansion mode, and with many owners offering attractive pricing, many retailers have found this to be the right time to make commitments," said Mr. Harbert. "With numerous deals in the pipeline, we expect to see activity continue into the second half of this year, leading to additional declines in availability."
On Madison Avenue, stretching from the south side of 57th street to the south side of 72nd street, availability hit its lowest level since the fourth quarter of 2007. With new commitments from high-end tenants, including Orianne Collins and DeLaneau, the availability rate hit 10.0 percent at midyear 2010, down from 12.8 percent at the end of the first quarter and down from 15.5 percent at this time last year. Average asking rents for ground floor space increased slightly, up $4.00 or 0.4 percent from $827 per square foot at the end of the first quarter to $831 per square foot at midyear 2010.
In Manhattan's upper Fifth Avenue submarket, the largest retail lease in the city's history was signed in the second quarter. In a deal arranged by Cushman & Wakefield Retail Services, Uniqlo will occupy 90,000-square-feet at 666 Fifth Avenue. Average asking rents for ground floor space in the submarket - which stretches from the north side of 49th street to the south side of 60th street - increased $67.00 or 3.2 percent, up to $2,100 per square foot at midyear 2010 from $2,033 per square foot during the previous quarter. Availability remained stable from the previous quarter at 6.6 percent.
Despite the increase in leasing activity and decreases in availability, Mr. Harbert pointed out that average retail rental rates were still off about 30 percent from their peak. He said the company will consider an overall increase in average rental rates as a sign of a sustained recovery in the retail market.
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