Manhattan Commercial Leasing and Investment Activity Rise in First Quarter

6 Apr, 2010, New York

Cushman & Wakefield today released first quarter statistics for the Manhattan commercial real estate market that show the pace of new office leasing and investment activity accelerated in the first three months of the year as companies and investors sought to capitalize on opportunities ahead of a recovery.

New leasing activity totaled 5.7 million square feet through March 31, 2010, up 3 million square feet, or 84 percent from the first quarter of 2009. In addition, leasing activity was up 14 percent sequentially from the fourth quarter of 2009, which was also viewed as a strong quarter, according to Joseph R. Harbert, Cushman & Wakefield's chief operating officer for the New York Metro Region.

"In the first quarter we saw the continuation of a trend that began in the second half of 2009 as companies started to pull the trigger on leasing decisions," Mr. Harbert said. "Larger tenants continued to be active in the market. There were eight deals completed over 100,000 square feet in the first quarter, half of them renewals. What we are starting to see now that is different is that more investment properties are starting to come to market and beginning to trade."

In the first quarter, $3.3 billion of Manhattan commercial property was sold or under contract, nearly equivalent to the value of all property sold in Manhattan for the full year 2009.

Despite increases in activity, new construction deliveries helped drive the overall office vacancy rate to 11.6 percent at the end of March, up from 11.3 at the end of February and 11.1 percent at the end of last year. The largest availability added to the statistical sample was 11 Times Square, a new class-A office building totaling more than 1 million square feet.

The sublease vacancy rate, which peaked at 3.0 percent in July 2009, declined to 2.6 percent from 2.7 percent at the end of December. The decline was the second consecutive quarterly drop in the sublease vacancy rate. Sublease space as a percentage of overall available space declined to 22.4 percent in March, down from 27.6 percent one year ago.

"After strong activity at the end of 2009, we expected continued demand in the first half of 2010," Mr. Harbert said. "Companies are targeting quality and value, and are reviewing their options against the backdrop of a potential economic recovery, which has been a strong motivator."

At the end of the first quarter, overall average asking rents in Manhattan registered a small decline to $55.38 from $55.52 at the end of December. Average asking rents have fallen to their lowest point in three years, when they averaged $53.43 per square foot at the end of the first quarter of 2007. In fact, they are down 24 percent from their peak of $72.97 in the third quarter of 2008.

New leasing activity in Midtown South totaled 924,000 square feet in the first quarter, up 190 percent from the same period last year. The vacancy rate in the submarket declined to 9.9 percent from 10.0 percent at the end of December.

In Midtown Manhattan leasing activity totaled approximately 4 million square feet, compared to only 1.8 million square feet in the first quarter of 2009. However, the vacancy rate rose to 12.6 percent from 12.0 percent at the end of December, driven by both new construction and the addition of several new blocks to the market.

Unlike Midtown and Midtown South, Downtown Manhattan experienced an 18 percent decline in new leasing activity year over year, to 755,000 square feet from 920,000 square feet in the first quarter of 2009. The vacancy rate rose to 10.0 percent from 9.6 percent at the end of December.

At the end of the first quarter, there was a $22.98 per square foot differential between the average asking rent in Midtown and Downtown. This represented an increase of more than $1.50 per square foot compared to the differential at the end of 2009.

During the first quarter, including renewals, the industries that accounted for the most leasing activity were financial services firms, at 21 percent; law firms, at 14 percent; government, education and social services organizations, at 11 percent; advertising firms at 7 percent; and Manufacturing firms at 6 percent.

INVESTMENT SALES

First quarter 2010 investment sales activity for transactions $10 million and higher totaled $3.3 billion, up 200 percent from the $1.1 billion in transactions closed or under contract in the first quarter of 2009. With $3.5 billion in transactions completed last year, the property sales market is easily on track to surpass 2009 volume by a multiple.

"Last year we saw numerous capital sources waiting for Manhattan to hit or near a bottom," said Mr. Harbert. "While these investors were previously on the sidelines, today we see an increasing universe of investors, domestic and global, proactively seeking to invest now. While supply is starting to loosen, demand still far outstrips supply."

Year-to-date, eight transactions with sales prices above $100 million have been closed or placed under contract, compared to seven transactions in all of 2009. The majority of those 2009 transactions were either sales by owner occupants seeking to raise capital or sales by lenders. In the first quarter of this year, "we are seeing investors choosing to sell in response to the market," Mr. Harbert said.

"This year the market is experiencing pricing pressure as a result of the large amount of capital focused on Manhattan," said Mr. Harbert. "Fundamentals also are starting to stabilize and investors are taking notice."

RETAIL

The Manhattan retail market continued to show signs of stability in the first quarter of 2010. Only one of the seven retail submarkets tracked by Cushman & Wakefield experienced a quarterly increase in availability, four saw a quarterly decrease, while two remained stable. Average asking rents for ground floor space increased in five of the seven submarkets.

"Though the improvements in many of the core markets have been subtle, they are signaling a return to stability," said Mr. Harbert.

In Soho, average asking rents increased $11.00 quarter-over-quarter, reaching $269 per square foot at the end of the first quarter. Availability decreased to 11.1 percent from 12.6 percent at the end of 2009.

Average asking rents on the stretch of Third Avenue from 58th Street to 79th Street were $242 per square foot at the end of the first quarter, up from $235 per square foot at the end of 2009. Availability was down to 10.5 percent from 11.8 percent at the end of 2009.

In the Times Square retail market, spanning Eighth Avenue to Broadway and 42nd to 49th Streets, average asking rents were up to $647 per square foot, an increase from $610 per square foot at the end of 2009. Availability remained unchanged at 9.3 percent.

On Manhattan's Upper West Side, average asking rents came down slightly to $282 per square foot, a $16.00 decrease from $298 per square foot at the end of 2009. At the same time, availability decreased to 8.4 percent, down from 9.2 percent at the end of 2009.

Availability on Madison Avenue remained steady at 12.8 percent, still down from 13.0 percent one year ago. Average asking rents fell slightly to $827 per square foot, down $7.00 from $834 per square foot at the end of 2009.

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