Midtown South is Manhattan's Hottest Submarket

2 Oct, 2012, New York

Cushman & Wakefield today released third quarter statistics for the Manhattan commercial real estate market that shows Midtown South continues to be the strongest submarket in Manhattan and tightest in the nation. The vacancy rates across all three major Manhattan submarkets increased slightly from last quarter as the average asking rents remained steady.

The overall Manhattan vacancy rate at the close of the third quarter was 9.6 percent, with 5.7 million square feet of new leasing activity. In comparison, 6.4 million square feet was completed in the third quarter of 2011. Despite the year-over-year decline in quarterly leasing, leasing activity this quarter is not far off from the 6.0 million-square-foot 10-year quarterly average.

A total of 16.8 million square feet of new leasing activity closed in the first nine months of 2012. In comparison, in the third quarter of 2011 there was a total of 24.1 million square feet of leasing activity. The leasing slowdown follows a year in which Manhattan office leasing reached the highest total since 2000, with 30.1 million square feet of new leasing activity.

"New York City continues to outperform most other U.S. cities, but some sectors are softening," said Ken McCarthy, Senior Economist and Senior Managing Director at Cushman & Wakefield. According to McCarthy, New York is one of three cities in the U.S. that has added more jobs than it lost in the recession. "The cities that are heavy with technology and energy in the employment base have recovered the most jobs," he said.

The average asking rent for overall Manhattan space totaled $58.83 per square foot at the end of the quarter, which is an increase of 4.8 percent year-over-year. The class-A asking rent is $67.06 per square foot, which is 3.7 percent higher than a year ago.

The Midtown South market has a vacancy rate of 6.6 percent, which is up from 6.1 percent last quarter. The increase can be attributed to the more than 425,000 square feet of space that came into C&W's statistical sample in the third quarter (space available within a six-month time frame), including space at 770 Broadway, 350 Hudson Street, 110 Fifth Avenue, and 11 Madison Avenue. The average asking rent in the submarket is $49.12 per square foot, which increased 10 percent year-over-year.

With the tightening of the Midtown South market, which is also known as "Silicon Alley" for its desirability among media and technology companies, tenants interested in space in this submarket "must consider Midtown South as a whole," said Andrew Peretz, a Cushman & Wakefield Executive Vice President.

Since Midtown South is a space-constrained market, tenants are looking at space in neighboring lower Midtown and Downtown. Peretz, who also presented the Downtown submarket at C&W's third quarter press conference, cited that "consistent leasing velocity combined with an inventory of available high-quality options are keeping Downtown at equilibrium."

Downtown is the only Manhattan submarket that had a year-over-year decrease in the vacancy rate. At the end of the quarter, the Downtown vacancy rate was 9.3 percent. That's up slightly from the 8.9 percent from last quarter, however, year-over-year the vacancy rate has decreased 0.6 percentage points. Asking rent has increased $0.73 per square feet to $39.83 per square foot from $39.10 per square foot last quarter. The class-A asking rent totaled $45.19 per square foot, which is up 4.6 percent year-over-year.

Retail in the Downtown market and across Manhattan continues to be vibrant. Tourism continues to be an important driver of retail activity, but as Jim Downey, a Cushman & Wakefield Executive Director, cited during his presentation on the retail market, "In measuring the strength of an overall market, it is also important to look at secondary markets where the impact of tourism and high daytime pedestrian activity is not as significant a factor."

Several significant retail transactions have been completed on the Upper East Side and Upper West Side that show the strength of the retail market in Manhattan. Activity in these corridors, apart from tourism, has been largely driven by infrastructure/transportation, population, and income level.

"10.4 million people pass through the Lexington and 68th Street subway each year and 13.7 million people pass through the 72nd Street and Broadway subway each year," Downey said.

The Midtown market closed the quarter with a 10.5 percent vacancy rate, up from 9.8 percent from last quarter. The average asking rent closed at $66.42 per square foot, up 3.7 percent year-over-year.

"As demand continues to muddle along, changes in supply will be a market driver going forward," said Lou D'Avanzo, a Cushman & Wakefield Vice Chairman.

Helen Hwang, a Cushman & Wakefield Executive Vice President, discussed Manhattan sales volume and activity citing that "pricing has held firm throughout the year, thanks in part to low interest and the high global demand for New York City real estate."

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