Manhattan Office Leasing on Pace to Be Highest Total in a Decade

A total of 24.1 million square feet of new leases were signed in the first nine months of 2011, with September marking the 12 consecutive month of leasing activity exceeding 2.0 million square feet in Manhattan. Year-over-year, leasing activity is up 28 percent from the 18.8 million square feet signed in the first nine months of 2010.

With a total of 393 million square feet, the Manhattan commercial real estate market is the largest Central Business District in the nation. Based on the space tracked by Cushman & Wakefield, Manhattan accounts for more than 25 percent of all the CBD office space in the nation.

Strong leasing activity continues to lower the overall average vacancy rate for Manhattan to 9.3 percent as of the end of the third quarter 2011, a decrease of 0.1 percentage points from midyear, 0.7 percentage points since the first quarter and demonstrated the lowest vacancy rate since February 2009. Year-over-year, the overall vacancy rate declined 1.5 percentage points from 10.9 percent at this time last year. The vacancy rate for class-A office space stayed flat from midyear at 10.0 percent, but decreased from 11.6 percent in 2010. The vacancy rates in both class-B and C buildings also decreased compared to the third quarter of 2010. The class-B vacancy is 8.4 percent and class-C is 8.6 percent compared to 9.8 percent and 10.1 percent at this time a year ago.

Overall average asking rents in Manhattan registered $56.15 per square foot at the end of the third quarter of 2011, up $2.35 per-square-foot or 4.4 percent from $53.80 per square foot a year ago. Asking rents have increased an average of $0.20 per-square-foot each month this year. The average asking rent for class-A space also rose, registering $64.68 per-square-foot at the end of the third quarter, up $3.99 per-square-foot or 6.6 percent from the third quarter of 2010.

"Through the third quarter, Manhattan commercial real estate fundamentals have strengthened, following the record pace of new leasing activity," said Joseph R. Harbert, Cushman & Wakefield's Chief Operating Officer for the New York Metro Region. "It is clear we have been in a hot leasing market."

Vacant space in Manhattan as of the end of September 2011 totaled 36.7 million square feet, a decrease of more than 6 million square feet from the third quarter of 2010. Sublease space, which accounts for only 15.2 percent of all available space in Manhattan, is down from 18.1 percent a year ago at this time, but slightly up during the quarter.

Net absorption, which is a measure of the net change in occupied space over a given period of time, was positive 3.6 million square feet, up from 3.2 million square feet at midyear.

The Manhattan commercial real estate market has three of the four tightest Central Business Districts in the nation. The Midtown South submarket at 6.1 percent has the lowest vacancy rate (a decrease of 1.0 percentage point from 7.1 percent at midyear 2011). Midtown South asking rents increased $0.40 per-square-foot year-over-year to $44.65 per-square-foot from $44.25 per-square-foot. The class-A asking rent increased a very substantial $10.12 per-square-foot year-over-year to $56.95 per-square-foot from $46.83 per-square-foot.

The Midtown class-A vacancy rate, which peaked at 13.9 percent in the first quarter of 2010 and decreased to 10.5 percent in the second quarter of 2011, is up slightly at 10.6 percent. Asking rent in the Midtown market increased $2.38 year-over year and $0.72 from midyear 2011. The class-A asking rent increased $3.51 year-over-year to $69.75 from $66.24.

The Downtown market, which has had very strong leasing activity in 2011, saw asking rents decrease slightly from $39.38 per-square-foot at the midyear point of 2011 to $39.10 per-square-foot by the third quarter. The class-A asking rent also decreased, dropping $1.10 per-square-foot from $44.29 per-square-foot at midyear to $43.19 per-square-foot in the third quarter. This decrease is attributed to the leasing of high-quality, above market priced space, not deterioration in asking rents.

"While this has been a strong year, New York, however, does face headwinds with the financial industry coming under pressure, but it appears to be well positioned to weather these challenges," said Ken McCarthy, senior economist and senior managing director at Cushman & Wakefield.

The top five leases of the quarter included a 271,247-square-foot lease to Pearson Plc at 330 Hudson Street, a 267,647-square-foot lease to Oppenheimer & Co. at 85 Broad Street, a 152,000-square-foot lease to Open Society Foundations at 1770 Broadway, a 125,811-square-foot lease to MSCI Inc. at Seven World Trade Center and a 112,941-square-foot renewal at 555 West 57th Street to Continuum Health Partners. Cushman & Wakefield was involved in three of the top five leases completed in the third quarter.

By industry, financial services accounted for 32.4 percent of all leasing year-to-date, followed by information/media at 27.5 percent and government, education and social services at 9.5 percent. This compares to the third quarter of 2010, when financial services accounted for 25.5 percent, followed by legal services at 11.2 percent and government, education and social services at 9.7 percent.

INVESTMENT SALES
The volume of property sales closed in Manhattan has reached nearly the same total as 2008. On an annualized basis, 2011 is expected to be the third highest total on record, exceeded only by 2006 and 2007. By the close of the third quarter of 2011, $19.4 billion in sales were completed, with $3.8 billion currently under contract, compared to $8.1 billion closed by the end of the third quarter of 2010. This represents an increase of 140 percent.

In the third quarter of 2011, a total of $6.3 billion in sales were recorded on top of a midyear total of $13.1 billion. The highest volume on record in Manhattan occurred in 2007, when total yearly sales hit $47.8 billion.

To date, class-A office product has accounted for $6.3 billion or 32 percent of the total property sales through the third quarter, followed by hotel property at $3.0 billion or 16 percent and multifamily property at $2.9 billion or 15 percent.

Institutional investors continued to lead in total acquisitions, accounting for 36 percent of this year's total sales, followed by private capital at 27 percent, real estate investment trusts (REITs) at 26 percent, up from 23 percent at the midyear point, and foreign investors at 9 percent.

"The volume has been strong in Manhattan," said Mr. Harbert. "The continued activity suggests that demand for stable, high-quality, well located assets make New York City a primary investment market. The perception of relative safety and preservation of capital and liquidity continue to drive investment decisions."

Recapitalizations have been a significant driver in the market. One notable transaction in the third quarter was Paramount Group Inc.'s recapitalization on 1633 Broadway, a 2.5 million-square-foot class-A office tower. The international real estate investment and management firm recapitalized a 49 percent interest in the property. Cushman & Wakefield Sonnenblick Goldman arranged the transaction.

RETAIL

Through the third quarter of 2011, the Manhattan retail market continued to perform exceptionally well. This is especially true in the primary corridors. The average ground floor asking rents increased or was flat in all but one submarket, with no large increases in availability rates.

The availability rate in SoHo, which stretches from West Houston to Grand Streets and West Broadway to Broadway, continued to decline to 4.2 percent, down 1.7 percentage points from the end of the second quarter of 2011. The average asking rent increased $33 per-square-foot to $301 per-square-foot, while premier streets like Broadway, Spring Street and Prince Street averaged almost $527 per square foot.

The most notable deals in SoHo completed in the third quarter were Tiffany & Co. at 97 Greene Street for 10,500 square feet and Lacoste at 541 Broadway for 4,800 square feet.

Only five units remain available for direct lease in the Upper Fifth Ave. market, from the north side of 49th Street to 60th Street. These spaces have an average ground floor asking rent above $2,075 per-square-foot.

The Lower Fifth Ave. market, from 42nd Street to the south side of 49th Street, continued to see increased demand.

Availability in the Times Square corridor remained slim in the third quarter. The average asking rent for ground floor space increased 5.5 percentage points to $842 per-square-foot even as leasing activity slowed.

In the Madison Ave. submarket, which stretches from 56th Street to 72nd Street, availability increased to 12.2 percent, the highest availability in the City. However, asking rents in Madison Ave. increased 3.1 percent since March 2011, to $863 per-square-foot by the end of the third quarter.

The Third Ave. and Upper West Side submarkets showed strong fundamentals, with flat asking rents from last quarter and relatively strong leasing activity.

The Downtown market had several notable deals, including an expansion for Century 21 and the opening of a 23,000-square-foot 24-hour Duane Reade. Moreover, the strength of the submarket is demonstrated by the plans to renovate the Winter Garden, and the 550,000-square-foot, multi-level retail component at the World Trade Center.

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