Cushman & Wakefield Reports: Midtown Manhattan Vacancy Drops Below 7%, Leverage Shifts To Landlords
11 Jul, 2006, New York
Big leases and lack of available space drive rents up throughout Manhattan
Cushman & Wakefield today released second quarter statistics for the Manhattan office market showing Midtown Manhattan’s vacancy rate dropping to 6.9 percent at midyear, down from 7.8 percent at the end of the first quarter. This decline brings the overall Midtown vacancy rate below the 7-9 percent range, which is typically described as equilibrium, for the first time in five years.
“A shortage of high-quality available space in Midtown and a lack of new product on the horizon has given landlords the upper hand,” said Joe Harbert, Cushman & Wakefield’s chief operating officer for the firm’s New York Metro Region.
Year-to-date, vacancy rates are down across all three major Manhattan submarkets of Midtown, Midtown South and Downtown. The most significant decline over the last year occurred in Midtown South, which experienced its lowest vacancy rate since the first quarter of 2001. Availability dropped to 6 percent at midyear 2006, down 3 percent from midyear 2005.
Average asking rents for Manhattan office space reached $43.46 per square foot at the end of June, up more than $2.50 from this time last year, and to the highest level in nearly four years. All three submarkets experienced rent hikes in the second quarter of 2006. Midtown asking rents rose more than 60 cents from last quarter, reaching more than $50.00 for the first time in four years.
Leasing activity surged in the second quarter of 2006, making up for a less active first quarter. More than seven million square feet of office space was leased, signifying the strongest second quarter in recent years.
“We’ve seen unusually strong market momentum in the second quarter,” said Mr. Harbert. “This was fueled by large deals completed in the second quarter and a lack of available office space. Tenants are recognizing that rents are continuing to rise and will only go higher. Early decisions are being made now to ensure space will be available for future growth needs.”
Mr. Harbert’s sentiments were supported by the number of tenants that have renewed and expanded their office space in 2006. At midyear 2006, seven of the top 10 deals tracked were renewals or expansions, compared to two of the top 10 at midyear 2005.
Financial services firms continued their reign as the most active industry leasing office space in Manhattan, accounting for 34 percent of leasing activity in the second quarter of 2006. Law firms – which had fallen to the seventh most-active industry at the end of the first quarter – rebounded to the number two position at the end of the second quarter, accounting for 13 percent of leasing activity. This increase in activity was fueled by several big deals in the second quarter, including Covington & Burling’s 158,000-square-foot lease and Seyfarth Shaw’s 92,259-square-foot lease, both at the New York Times Building.
Financial services firms were not only the most active industry in the second quarter, but were also among those tenants willing to pay Manhattan’s highest rents. Year-to-date, 20 leases have been signed with rents above $100 per square foot, compared to just 10 in all of 2005. Twelve of the 20 were financial services tenants.
“Things continue to look up Downtown,” according to Mr. Harbert. Rents were up and vacancy was down at midyear, compared to figures at the end of the first quarter and at this time last year. Asking rents for class-A office space Downtown rose 75 cents from last quarter to $40.23, and jumped nearly $6.00 from midyear 2005.
“Downtown has the potential to be reinvigorated as a global business center,” said Mr. Harbert. “With the agreement for rebuilding the World Trade Center site and the recent news of interest in the new Freedom Tower, rebuilding efforts are underway. New residential units, world-class retailers and modern transportation hubs will complete the puzzle Lower Manhattan has been grappling with these past five years.”
Mr. Harbert also alluded to the tightening Midtown and Midtown South markets. “The vacancy rate, as well as large blocks of available space, are shrinking in Midtown. This lack of space is contributing to fast-rising rents for the city’s best buildings. Pair that with Midtown South’s extremely low vacancy rates and companies are going to want or need to explore their options Downtown.”
Several major companies demonstrated their interest in Lower Manhattan in the second quarter of 2006. BearingPoint leased more than 50,000 square feet at Three World Financial Center and Reliance Insurance took more than 47,000 square feet at 75 Broad St. Additionally, the federal government signed a letter of intent to take more than one quarter of the space at the two million-square-foot Freedom Tower.
In addition to major corporations, luxury retailers showed interest in Downtown Manhattan during the first half of 2006. Downtown continues to experience a retail renaissance from both national and international tenants expecting a huge residential and office revitalization in the near future. In the second quarter, Tiffany & Co. signed a 7,700-square-foot deal at 37 Wall St., following Hermes’ first quarter lease at 15 Broad St., and solidifying Downtown’s position as a new luxury destination. Other high-end retailers are expected to follow the lead of these internationally recognized brands by opening up Downtown.
The second quarter of 2006 saw an increase in foreign retailers looking to enter the U.S. market. According to Mr. Harbert, foreign retailers see Manhattan as a lucrative market with dense buying power. Japanese apparel retailer Uniqlo is in the process of opening its 36,000-square-foot flagship location at 564 Broadway, after attaining success with two smaller temporary locations. Other retailers, including spas, food and apparel, have expressed serious interest in the U.S.
M&M’s signed a 22,000-square-foot deal at 1600 Broadway this quarter in Times Square, further exemplifying the way companies use retail real estate as a tool for branding. The Mars Company follows in the footsteps of the Hershey’s store in the same area, and the Disney store on Fifth Avenue, by leasing space with large signage and high pedestrian traffic.
A healthy economy, limited new inventory, a strong comeback in corporate travel and favorable currency exchange rates put demand for Manhattan hotel rooms at an all-time high in the first half of 2006. Year-to-date, occupancy has remained steady at 80 percent, on the same page as this time last year. However, the average rate jumped more than $23.00 to $210.72, up from $187.62 at midyear 2005. Mr. Harbert attributed the rate spike to high demand, especially from the “group business” segment, and “a city that is undersupplied in hotels.” Even those hotels slated for development are boutique, offering less than 200 rooms each. With a relatively sparse 2006 development pipeline and a rise in construction costs making larger hotels economically difficult to plan, demand is expected to far outpace supply for the foreseeable future, and the second half of 2006 will be as strong, if not stronger, than the first half.
The Manhattan investment sales market is on pace for another record year, according to Mr. Harbert. Year-to-date, more than $8.4 billion in transactions were completed, compared to $6.9 billion at midyear 2005. Additionally, there is currently more than $10 billion in transactions under contract. When taking into account those deals under contract, private investors have been the most active year-to-date, accounting for more than 42 percent of investment activity. Foreign investors accounted for 23 percent, up from just six percent at this time last year. The strength of foreign capital was demonstrated by several sales in the second quarter, including Dubai-based investor Istithmar’s purchase of 1466 Broadway and Elad Properties’ purchase of 250 West St. Major office properties, including 1211 Avenue of the Americas, 522 Fifth Ave. and the Zeus portfolio of 509, 535 and 545 Fifth Ave., garnered attention from investors in the second quarter, as class-A office properties accounted for nearly 40 percent of transactions at midyear. According to Mr. Harbert, there is more capital than product available, and with continued strong leasing fundamentals, a tightening market and a lack of speculative development, the investment market will maintain its strength through yearend.
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