Manhattan Office Rents Set All-Time Record

Cushman & Wakefield today released its first quarter report for the Manhattan commercial real estate market showing average asking rents for Manhattan office space have reached record highs.

At the end of March, overall average asking rents for Manhattan climbed to $53.43 per square foot, the highest ever recorded.  Class-A asking rents increased 29 percent, also setting a record at $64.54 per square foot.  At the same time, Manhattan’s overall vacancy fell to 5.7 percent, dipping below 6 percent for the first time in six years.

“We have seen unprecedented rental growth in the Manhattan office market over the past year,” said Joseph R. Harbert, chief operating officer of Cushman & Wakefield’s New York Metro Region.  “With limited supply and steady job growth, we foresee demand increasing, and rents continuing to reach new highs.”

The three submarkets of Midtown, Midtown South and Downtown all charted positive rent increases in the first quarter, with class-A space in Midtown also reaching an all-time high, at $70.77 per square foot.

As rents soared in Midtown, Manhattan office users explored options in Lower Manhattan, resulting in considerable increases in leasing activity there.  At the end of March, leasing activity Downtown totaled nearly 1.3 million square feet, up 67 percent from the 750,000 square feet leased during the first quarter last year.  Activity Downtown accounted for 23 percent of all Manhattan leasing this quarter, while it accounted for only 13 percent in the first quarter of 2006.

The most substantial increases in activity were in class-B and class-C properties Downtown, where leasing increased by 51.5 percent and 250 percent, respectively.  According to Mr. Harbert, tenants being priced out of class-A product Downtown are proactively seeking opportunities in lesser-quality buildings.

Increased leasing activity led to a steep decline in availability Downtown.  The overall vacancy rate Downtown fell 4.4 percentage points from this time last year, ending the first quarter of 2007 at 7.2 percent.

“Downtown’s overall vacancy rate is seconds away from falling below equilibrium,” said Mr. Harbert, referring to the 7 to 9 percent vacancy range, where neither landlords nor tenants are assumed to have an advantage.  “That’s quite impressive for a market that registered double-digit vacancy just seven months ago.”

The class-A vacancy rate Downtown, which had swelled to 12.5 percent this time last year due to the addition of Seven World Trade Center, fell more than 6 percentage points to 6.3 percent.  Competition for the best space Downtown bumped class-A asking rents up 20 percent from this time last year, to $47.41 per square foot.

Large blocks of space available in Manhattan were quickly absorbed over the last 12 months, as tenants sought opportunities to house operations on contiguous floors.  At this time last year, there were 16 blocks of space in excess of 250,000 square feet, while at the end of March there were only seven in all of Manhattan.

With large-block opportunities dwindling, smaller and mid-sized transactions accounted for the majority of activity in the first quarter, with only one new lease signed in excess of 100,000 square feet.  There were 60 more leases completed in Manhattan than last year at this time; however, the total square footage of these leases was nearly 350,000 square feet less.

This trend was particularly apparent Downtown, where the number of deals under 10,000 square feet increased by 50 percent compared to this time last year.

“Though rents are increasing at a rapid pace, Downtown still offers smaller tenants significant value when compared to Midtown,” said Mr. Harbert. “These tenants are taking advantage of the current conditions Downtown, before the market rises even higher.”

Financial services firms continued as the most active industry in Manhattan, accounting for 35.7 percent of leasing to date.  Renewed activity by legal services upped their share to 15.3 percent, an increase from 4.2 percent at this time last year. 

Law firms accounted for three of the top ten new leases in the first quarter, including Schulte Roth & Zabel’s 88,000-square-foot lease at 919 Third Avenue.  Other large leases included Bear Stearns’ 100,242-square-foot expansion at 237 Park Avenue, Moody’s 78,550-square-foot expansion at Seven World Trade Center and QBE Insurance Group’s 76,489-square-foot lease at 88 Pine Street.

Financial services firms continued to sign Manhattan’s most expensive leases in the first quarter of 2007, accounting for more than three-quarters of the 18 transactions with taking rents above $100 per square foot.  Of the 11 buildings where these leases were completed, six saw triple-digit rents for the first time ever. 

INVESTMENT SALES

Following another record-breaking year in 2006 with $34.7 billion in sales closed, the Manhattan investment sales market showed no sign of a slowdown in 2007.  More than $13.6 billion in sales closed in the first quarter, compared to $2.7 billion at this time last year.  In addition, there are $11.9 billion in transactions under contract.

In one of the most high-profile transactions of the first quarter, Macklowe Properties purchased eight class-A office buildings in Midtown for a total of $7.2 billion, or more than $1,100 per square foot.  Class-A office properties accounted for 90 percent of sales closed in the first quarter.

“The most active and aggressive buyers of trophy office properties in Manhattan are investors who already have significant holdings here,” said Mr. Harbert.  “These players understand from first-hand experience the pulse of the leasing market, and that the serious shortage of space and accelerating rental rates will play out well for the investment market.”

 In addition to favorable leasing fundamentals, Mr. Harbert pointed to continued low interest rates, as well as strong employment and economic forecasts, as drivers of the investment sales market. 

RETAIL

The Manhattan retail market continued to advance in the first quarter of 2007, as new retailers entered and established favorites relocated to accommodate for growth.  Anne Fontaine relocated from 600 square feet at 687 Madison Ave. to 6,200 square feet at 677 Madison Ave., where she will open her North American flagship early next year.  Home furnishings newcomer CB2, a sister store of Crate and Barrel, signed an 18,000-square-foot lease at 451 Broadway for its first location outside of Chicago.  Another new furniture retailer, Mitchell Gold + Bob Williams, entered the market at 210 Lafayette Street.

Retail rents rose steadily across the four submarkets of Soho, Fifth Avenue, Madison Avenue and the Upper West Side.  At the end of the first quarter, asking rents on Madison Avenue averaged $985 per square foot, with the most expensive spaces asking $1,200 per square foot.

Realizing the rising value of retail real estate, landlords made moves to capitalize on increasing retail rents.  At 112 West 34^th Street, W&H Properties will reconfigure the building’s lobby to incorporate a 1,600-square-foot store for Billabong.

Foreign retailers continued to show interest in the Manhattan retail market in 2007.  Japanese retailer Muji signed on as the first retail tenant at The New York Times building, in addition to a lease a 455 Broadway in Soho.

“Foreign retailers believe opening locations in Manhattan is the best way to get U.S. exposure for their brand,” said Mr. Harbert.  “Our retail services professionals are in the midst of speaking with numerous overseas retailers – ranging from apparel to skin care – who are interested in making their mark on the Manhattan market.”

Founded in New York City in 1917, Cushman & Wakefield is the largest New York-based commercial real estate firm and the preeminent global real estate services provider.  From its Midtown Manhattan world headquarters, the firm operates more than 201 offices in 55 countries around the globe and employs more than 12,000 professionals. In addition to office brokerage, Cushman & Wakefield maintains one of the industry’s strongest retail services groups.  The firm is New York City’s largest property manager, with more than 60 million square feet of property under management through its Asset Services division.  The company is a leader in investment sales, valuation, research and other advisory services, available through the company’s Corporate Services group or directly through the firm’s Advisory Group.  Cushman & Wakefield maintains eight full-service offices in the New York/New Jersey region.  In addition to Midtown and Downtown Manhattan, Cushman & Wakefield maintains leading metropolitan area offices in Stamford, Conn., White Plains and Melville, N.Y., East Rutherford, Edison and Parsippany, N.J.  To find out more about Cushman & Wakefield, visit the firm’s Web site at www.cushwake.com.