Manhattan Office Vacancy Rate Falls For 2nd Consecutive Month

A substantial increase in leasing activity in the second half of 2009 helped offset space added to the market, keeping the vacancy rate unchanged from the end of the third quarter.

Leasing activity for all of 2009 totaled 16.3 million square feet, a decline of 15 percent from the prior year and the lowest annual total of the decade. However, leasing activity in the second half of 2009 totaled 9.9 million square feet, an increase of 56 percent from activity in the first half of the year.

During the fourth quarter of 2009, there were 10 leasing transactions completed that were greater than 100,000 square feet, compared to five transactions above that size in the fourth quarter of 2008.

In addition to stronger leasing activity, 2009 experienced a surge in lease renewals, which accounted for 28 of the 50 largest leases. The sublease vacancy rate, which peaked at 3.0 percent in July 2009, declined to 2.7 percent from 2.8 percent at the end of November. The decline was the first quarterly drop in the sublease vacancy rate since reaching a six year low of 0.9 percent in December 2007.

Joseph R. Harbert, Cushman & Wakefield?s chief operating officer for the New York Metro Region, said, "The fourth quarter activity in the Manhattan office market clearly indicates an improving environment relative to the first half of 2009 and suggests the market has started to stabilize."

Mr. Harbert said that many of the largest firms in Manhattan have acted early to renew leases and take advantage of favorable rental rates, and that the activity would likely continue into the first half of 2010.

At year end, overall average asking rents in Manhattan fell to $55.52 from $57.08 at the end of the third quarter. Average asking rents have fallen to their lowest point since the first quarter of 2007, when they averaged $53.43 per square foot, and are down 24 percent from their peak of $72.97 in the third quarter of 2008.

The majority of new leasing activity occurred in Midtown Manhattan, where the office vacancy rate dropped to 12.0 percent from 12.2 percent at the end of November.

Downtown Manhattan's vacancy rate declined to 9.6 percent from 10.1 percent in November, driven by new leasing activity in the month of December totaling more than 567,000 square feet, or about 17 percent of the entire year's activity Downtown.

The Midtown South vacancy rate experienced a slight increase to 10.0 percent from 9.9 percent at the end of November.

At the end of December, there was a $21.46 differential between the average asking rent in Midtown and the average asking rent Downtown.

For the year, financial services firms were by far the most active industry in Manhattan, accounting for 25 percent of all leasing activity, followed by legal services, which accounted for 11 percent and communications firms, which accounted for approximately 6 percent. However, of the 10 largest leases in 2009, five were completed by law firms.

INVESTMENT SALES

The Manhattan property sales market finished 2009 with $3.5 billion in transaction volume, an 82 percent decline from $19.6 billion in 2008 and a 93 percent decline from $47.7 billion in 2007.

In 2009, capital markets activity was limited by three factors. Early in the year, more investors were reluctant to invest with the concern that values would decline further, and financing has been extremely difficult to obtain. However, the prevailing obstacle to investment activity in 2009 was the dearth of owners and lenders willing to recognize losses and sell assets.

According to Mr. Harbert, "We are starting to see signs of improvement. There are signs of stabilization in office market fundamentals, and the availability of financing is improving. We've seen an increase in activity, including foreclosures and workouts."

As 2009 progressed, more investors - domestically and globally - chose to come off the sidelines, with New York City being a top target market.

"There is a big supply and demand imbalance," said Mr. Harbert. "The high level of frustrated capital should help more owners and lenders opt to sell in 2010 than we saw in 2009."

Overall, New York City property values have declined 30 percent to 60 percent depending on factors such as existing operating income, credit worthiness of the existing tenants and the rollover profile of the property.

Among properties that traded in 2009, class-A office buildings accounted for $1.2 billion, or 34 percent of the total, all in Midtown, with other office properties accounting for approximately $600 million. Included in the class-A total were the two largest sales of 2009, which included 825 Eighth Ave. for $590 million and 1540 Broadway for $355 million.

RETAIL

Manhattan's retail market showed the beginning signs of stability at the end of 2009. Two of the submarkets tracked by Cushman & Wakefield experienced a decrease in availability, while half of the submarkets tracked actually showed an increase in average asking rents for ground floor space.

Increases in asking rents may indicate that better spaces are coming onto the market, and that owner confidence has increased, said Mr. Harbert.

At the end of 2009, average asking rents for ground floor space in Times Square were $658 per square foot, an increase of $71 per square foot, or 12 percent, from the end of the third quarter. This occurred despite the fact that availability also increased, up 1.4 percentage points from 9.3 percent at the end of the third quarter, ending 2009 at 10.7 percent.

In Soho, asking rents increased to $258 per square foot, up $19 per square foot, or 8.0 percent, from the end of the third quarter. Availability there also increased, to 12.6 percent from 10.8 percent at the end of the third quarter.

On Manhattan's Upper West Side, average asking rents for ground floor space ended the year at $298 per square foot, a $9 per square foot or 3.0 percent increase from the previous quarter. Availability decreased from 11.1 percent at the end of the third quarter, to 9.2 percent at the end of 2009.

Availability on the stretch of Fifth Avenue from 42nd Street to 49th Street remained stable at the end of 2009, ending the year at 13.9 percent, up only slightly from 13.8 percent at the end of the third quarter. Average asking rents decreased $11 per square foot, or 3.4 percent, ending the year at $511 per square foot.

On the northern stretch of Fifth Avenue, spanning the north side of 49th Street to the south side of 60th Street, availability remained stable at 3.3 percent. Average asking rents decreased slightly to $2,000 per square foot, down $250 per square foot from the end of the third quarter.

After three consecutive quarters of increases, availability on Madison Avenue declined during the fourth quarter of 2009, ending the year at 12.8 percent, down 3.3 percentage points from the end of the third quarter. Average asking rents on the luxury corridor decreased $10 per square foot quarter-over-quarter, ending the year at $834 per square foot.

"We believe the Manhattan retail market has bottomed," said Mr. Harbert. "Looking forward, we expect that most of the submarkets will remain at the level they are now for the first few months of the year, and that absorption will return in the second quarter of 2010."

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OFFICE MARKET STATISTICS BREAKDOWN

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Cushman & Wakefield is the world's largest privately held commercial real estate services firm. Founded in 1917, it has 227 offices in 59 countries and more than 15,000 employees. The firm represents a diverse customer base ranging from small businesses to Fortune 500 companies, offering a complete range of services within four primary disciplines: Transaction Services, including tenant and landlord representation in office, industrial and retail real estate; Capital Markets, including property sales, investment management, valuation services, investment banking, debt and equity financing; Client Solutions, including integrated real estate strategies for large corporations and property owners, and Consulting Services, including business and real estate consulting. A recognized leader in global real estate research, the firm publishes a broad array of proprietary reports available on its online Knowledge Center at www.cushmanwakefield.com.