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Cushman & Wakefield's 1Q Report Shows Manhattan Office Rents Are On The Rise
4 Apr, 2006, New York, NY
Rents driven up by competition for existing space and new construction; largest tenants lock in room for growth as available space declines
Cushman & Wakefield today released its first quarter report for the Manhattan commercial real estate market showing rents rising across the city's three major office markets of Midtown, Midtown South and Downtown.
Average asking rents for Manhattan office space reached $43.20 per square foot at the end of March, their highest point in three and a half years, compared to $40.58 at year-end 2005. The rent rise comes as overall leasing activity slowed in the first quarter, totaling 5.4 million square feet, down 19 percent from 6.7 million square feet in the first quarter of 2005.
More significantly, the number of tenants willing to pay a premium for the city's most expensive space has jumped dramatically. In the first quarter alone, 15 leases were completed at rents of more than $100 per square foot, compared to just 10 in all of 2005.
Joe Harbert, Cushman & Wakefield's chief operating officer for the firm's New York Metro Region, said the rising rents are attributable to "a limited supply of available high quality space in Midtown, competition among tenants for existing space, and the addition of newer buildings to the market at significantly higher rents, which together tend to pull asking and effective rents up."
The vacancy rate for class-A space in Midtown available directly from owners stood at 5.8 percent at the end of the first quarter, up slightly from 5.6 percent at yearend. The overall Midtown vacancy rate for all classes of space remained at 7.8 percent, unchanged from year-end statistics, despite the addition of new space related to the completion of 505 Fifth Avenue, a new building in the Grand Central District.
In Downtown Manhattan, average asking rents rose to roughly $35 per square foot, up from $31 at the end of the year. The Downtown vacancy rate rose to 11.6 percent from 10.6 percent during the same time period. The increase in both cases was due primarily to the completion of 7 World Trade Center - the first new office building to be built at the site of the former World Trade Center - and the addition of its available space inventory to statistics.
Despite the vacancy rate rise, Downtown Manhattan's vacancy is still among the lowest in the nation, ranking seventh among 30 major U.S. markets at the end of the first quarter, according to Cushman & Wakefield statistics. The top 10 markets in the nation with the lowest vacancy rates are Midtown South in Manhattan (6.2%), Washington, D.C. (7.1%), Bellevue, Wash. (7.5%), Midtown Manhattan (7.8%), Orange County, Calif. (8.5%), Portland, Ore. (11.2%), Downtown Manhattan (11.6%), Seattle, Wash. (11.6%), Oakland, Calif. (12.6%) and Boston, Mass. (12.9%).
Bruce Mosler, Cushman & Wakefield's president and chief executive officer, said the fundamental health of the Downtown Manhattan commercial real estate market has been overshadowed by indecision over the World Trade Center rebuilding effort.
"You have the fourth largest business district in the nation holding its own in an environment of uncertainty," Mr. Mosler said. "The fact is that New York City is facing an office space shortage, which requires immediate attention to shift ongoing debate back to business. Preservation of New York's stature as the world's financial and business capital depends to a large degree on fulfilling the needs of growing companies. Downtown Manhattan is the most viable option for the near and mid-term to meet the demand for new office space."
The shortage of office space Mr. Mosler alluded to is predominantly in Midtown and Midtown South. During the first quarter of 2006, businesses anticipating a rapidly decreasing landscape of premier office space, either renewed leases early or added more space to their existing leases. The number of office lease renewals or expansions of 50,000 square feet or more totaled nine in the first quarter of 2006, compared to four in the first quarter of 2005.
According to Mr. Harbert, as available space in Midtown Manhattan continues to decline, Downtown's options will increasingly appeal to tenants in the market. The gap between the most expensive submarket in Midtown and the least expensive submarket Downtown - for comparable class-A space - was $46 per square foot at the end of the first quarter.
Mr. Harbert explained that the difference in annual rent for a 10,000 square foot class-A lease in Midtown's Madison-Fifth Avenue submarket, which has average asking rents of $74.78 per square foot, and Downtown's Financial West, which has average rents of $28.86, would be nearly $500,000 annually.
"The cost savings Downtown are tremendous, and clearly one of the most important factors influencing tenants' decisions to locate operations Downtown," said Mr. Harbert.
Financial services firms continued to be the most active industry leasing office space in Manhattan, accounting for 37.5 percent of all leasing year to date, compared to 28.8 percent in all of 2005. Law firms, the second most active industry in 2005, fell to seventh most active, as not-for-profit and government agencies moved into second place at more than 13 percent of all leasing. Communications and media firms were the third most active, accounting for almost 9 percent of leasing.
Among the top leasing deals of the first quarter were Bank of America at One Bryant Park (516,000 square feet), Ross Stores at 1372 Broadway (165,000 square feet), and Advance Magazine Publishers at 1166 Avenue of the Americas (81,000 square feet).
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