New Manhattan Office Leasing Reaches Highest Total In More Than A Decade
12 Jul, 2011, New York
Cushman & Wakefield today released second quarter statistics for the Manhattan commercial real estate market that show new office leases are being signed at a record pace. A total of 17.6 million square feet of new leases were signed in the first six months of 2011, the highest six-month total in more than a decade. In May and June alone, new leasing activity totaled nearly eight million square feet, the highest two-month total in Cushman & Wakefield's records. Year-over-year, leasing activity is up 40 percent from the 12.6 million square feet signed in the first half of 2010.
Strong leasing activity helped lower the overall average vacancy rate for Manhattan to 9.4 percent at mid-year 2011, a decrease of 0.5 percentage points from one month ago, marking the largest one-month decrease since December 2005. Year-over-year, the overall vacancy rate declined 1.4 percentage points from 10.8 percent at midyear 2010. The vacancy rate for class-A space declined steadily to 10.0 percent at midyear 2011, down from 10.7 percent at the end of the first quarter and down from11.5 percent at this time a year ago.
Overall asking rents in Manhattan registered $55.52 per square foot at midyear 2011, up $1.21 or 2.2 percent from $54.31 per square foot at midyear 2010. The average asking rent for Class-A space also rose, registering $63.58 per square foot at midyear, up $1.62 or 2.6 percent from $61.96 per square foot at the end of 2010.
"The strong second quarter coupled with a record pace of leasing activity in the first six months of the year is proof of a rapidly strengthening market," said Joseph R. Harbert, Cushman & Wakefield's Chief Operating Office for the New York Metro Region.
Vacant space in Manhattan declined more than 4.4 million square feet since the end of 2010, to 36.7 million square feet at midyear. A lack of sublease space added to the market was a key contributing factor to the declining vacancy rate. Sublease space - which has decreased the past seven months and now totals 5.3 million square feet - accounts for only 14.4 percent of all available space in Manhattan, down from 21.9 percent a year ago at this time.
Absorption, which is a measure of the net change in occupied space over a given period of time, was positive 3.2 million square feet - the first time absorption has been positive for the January through June time period since the first half of 2007.
The Midtown market continued to lead the way in activity, with 6.1 million square feet of new leases in the second quarter. Eight transactions of 100,000 square feet or larger closed in Midtown during the second quarter, up from seven transactions in the first quarter.
The Midtown Class-A market, which was hit the hardest during the recession, has recovered the fastest. The Class-A vacancy rate, which peaked at 13.9 percent in the first quarter of 2010, decreased to 10.5 percent in the second quarter of 2011.
The vacancy rate in Midtown South registered 7.1 percent at midyear 2011, which was by far the lowest vacancy rate of any major central business district in the nation, down from 9.2 percent at this time last year. As a result, asking rents in Midtown South increased 2.1 percent from this time last year, to $44.63 per square foot from $43.71.
The Downtown market saw strong activity in the second quarter, led by Conde Nast's one million-square-foot deal at One World Trade Center. Asking rents Downtown rose more rapidly than other markets, with overall rents up 4.2 percent from a year ago, to $39.38 per square foot, while Class-A rents are up 11.3 percent to $44.29 per square foot.
"The New York City economy continues to outperform the rest of the nation," Mr.
Harbert said, "and that trend is showing up in the commercial real estate fundamentals. We
anticipate that national employment growth will pick up its pace from what was a slow second
quarter, which will cause New York to experience further increases in demand for
By industry, financial services accounted for 28.2 percent of all leasing year-to-date, followed by information/media at 27.5 percent and government, education and social services at 11.8 percent. This compares to the first half of 2010, when financial services accounted for 22.6 percent, followed by legal services at 12.1 percent and government, education and social services at 11.9 percent.
On an annualized basis, with the more than $13.1 billion in sales closed and nearly $4.4 billion under contract during the first half of 2011, overall property sales for 2011 would reach $35 billion, on par with investment volume in 2006 and the second highest annual sales volume in the city's history. The highest volume occurred in 2007, when total sales hit $47.8 billion.
"Property values are increasing rapidly in Manhattan - partly as a result of improving leasing fundamentals and partly as a result of a tremendous amount of capital focused on New York City," said Mr. Harbert.
Class-A office sales have totaled $5 billion year to date, attracting the most investment capital. Hotel property and development sites followed with $2.2 and $2.0 billion, respectively. Institutional investors have accounted for 36 percent of this year's acquisitions, followed by private capital at 29 percent, real estate investment trusts at 23 percent, and foreign investors at 9 percent.
After strong leasing activity in both the Upper and Lower Fifth Avenue corridors earlier this year, availability rates are at extremely low levels. Only three units remain available for lease in the Upper Fifth Avenue market, which spans Fifth Avenue from from 49th to 60th Streets. These spaces have an average ground floor asking rent above $2,000 per square foot.
Times Square is another corridor where availability is tight. The Times Square Theater leased over 30,000 square feet at 215 West 42nd Street this quarter, helping drop the availability rate to just 5.1 percent. The "Bowtie" - spanning from 42nd to 47th Streets on Broadway continues to see heightened asking rental rates that exceed $1,500 per square foot.
In SoHo, from West Houston to Grand Streets and West Broadway to Broadway, availability continued to decline to 6.5 percent, down from 8.4 percent at the end of 2010. More than 14 retail spaces were leased this quarter in SoHo, with apparel retailers taking the majority of the units. Though ground floor asking rents in the submarket average $268 per square foot this quarter, on premier streets like Prince, Spring and Broadway, asking rents on spaces can exceed $600 per square foot.
Availability in the Madison Avenue market, which stretches from 56th to 72nd Streets, decreased slightly to 11.1 percent, although the market continues to have high availability. Recent activity helped drive asking rents up to $838 per square foot this quarter, a 2.3 percent increase from the first quarter of 2011.
Leasing activity in the Third Avenue market was strong, with nine spaces leased. Tenant leases in high priced spaces included The Gap, Verizon Wireless and Zales.
"The reason for the strength is that there has been strong absorption for new supply throughout Manhattan and demand has outpaced new supply," said Tom McConnell, a senior managing director at Cushman & Wakefield Sonnenblick Goldman. "The average occupancy rate, which suffered in 2009, is almost back to its peak from 2007."
There have been 16 transactions for $4.2 billion in the first six months of 2011 compared to six transactions and $448 million in the first six months of 2010 and 11 transactions and $1.1 billion for all of last year.
The buyer type in the last two years has been primarily U.S. REITs followed by real estate funds followed by domestic and international private buyers.
The top three transactions in the first six months of 2011 include a $446 million transaction by Pebblebrook Hotel for 49 percent interest in the Denihan Hospitality Group, which is a total of six hotels, a $400 million transaction by Northwood Investors for The New York Palace Hotel and an $80 million transaction for the Chelsea Hotel, which was sold by a group of families to Joseph Chetrit.