Manhattan Office Rents On The Rise Across Three Major Submarkets; Vacancy Rate Remains Flat

Average asking rent for Manhattan office space reached $58.90 per square foot at the end of March, an increase of 7.6 percent year-over year. The three major submarkets - Midtown, Midtown South and Downtown - saw increases of 1.9 percent, 5.6 percent and 0.8 percent, respectively, over last quarter. The rent rise comes as overall leasing activity slowed in the first quarter, totaling 5.8 million square feet, down 24 percent from 7.6 million square feet in the first quarter of 2011. The leasing slowdown follows a year in which Manhattan office leasing reached the highest total since 2000, with 30.1 million square feet of new leasing activity.

"In 2011 we saw three quarters of strong leasing activity followed by a soft fourth quarter," said Joseph R. Harbert, Cushman & Wakefield's Chief Operating Office for the New York Metro Region. "We're seeing a continuation of that sluggishness into 2012, but expect the second half of the year to be stronger. Even so, we've seen asking rents increase over each of the submarkets, while the vacancy rate has remained flat."

At the end of the first quarter, the overall Manhattan commercial real estate market had a vacancy rate of 9.1 percent. Leading the way with the largest year-over-year decrease in vacancy rate was Midtown South, which closed at 5.9 percent, down from 6.4 percent from last quarter. The Midtown South submarket, also known as "Silicon Alley," has become the preferred location for media and technology companies on the East coast and stands as the tightest market of all the Central Business Districts in the nation. The class-A vacancy in this market stands at only 4.6 percent.

Although financial services make up a third of the office space user in Manhattan, growth in other sectors, such as technology, has helped New York rebound from the recession. "New York is not just a financial town anymore," said Ken McCarthy, senior economist and senior managing director at Cushman & Wakefield. "While it is and always will be an important financial capital, we've diversified into many other industries and have seen growth in technology, professional services, education and health, leisure and hospitality."

Direct absorption was positive (323,479 square feet) indicating that landlords saw space taken off the market. This is confirmed by the small 0.1 percent decline in the direct vacancy rate. However, this positive absorption was offset by more sublease space that came to the market. This caused overall absorption to be slightly negative (-372,724 square feet). These two trends roughly offset each other leaving the vacancy rate unchanged.

Although the overall vacancy rate in Manhattan remained flat, the year-over-year class-A vacancy rate decreased 0.6 percent to 10.1 percent, with an average asking rent of $67.30, an increase of 7.7 percent year-over-year. The class-B vacancy rate decreased 1.0 percent to 7.8 percent, with an average asking rent of $41.19, an increase of 1.0 percent and the class-C vacancy rate, which saw the largest decline this quarter, decreased 2.6 percent to 6.6 percent, with an average asking rent of $38.10, an increase of 1.6 percent.

The Midtown South class-A market, which has seen the lowest vacancy and the fastest asking rent growth, saw rents increase to $67.52 from $57.44. That's an increase of $10.08 from last quarter and a 33 percent increase year-over-year. It is also only $4.56 less than the Midtown class-A asking rent. The vacancy rate at the end of the quarter closed at 5.4 percent.

The Downtown Market ended the quarter with a vacancy rate of 9.2 percent, down from 9.5 percent last quarter. Asking rents increased to $40.37 per-square-foot, up $0.49 or 1.2 percent from last quarter. The class-A asking rent closed at $45.24, up 5.1 percent year-over-year.

The Midtown market, which closed the quarter with a 9.9 percent vacancy rate, saw the average asking rent close at $66.70, up $1.28 or nearly 2 percent from last quarter. The class-A asking rent increased to $72.08, up 6.4 percent year-over-year.

Even with asking rents rising, demand for large space continued this quarter. In the first three months of 2012, there were 13 deals of 100,000 square feet or more completed.

Among the top leasing deals of the first quarter was Bank of America Merrill Lynch (345,737 square feet) at 114 West 47th Street, DataGryd (241,218 square feet) at 60 Hudson Street, and Information Builders (219,000 square feet) at Two Penn Plaza.

INVESTMENT SALES
The volume of property sales closed at the end of the first quarter was on par with the total sales volume a year ago at this time. By the end of the first quarter, $5.7 billion in sales was completed, with $1.5 billion currently under contract.

The investment market has been driven by multifamily sales and class-A office. Multifamily sales more than doubled year-over-year volume. It accounted for $1.5 billion or 27 percent of the total property sales at the end of the quarter, compared to $720 million at this time a year ago. Class-A office space continued to lead the total volume, accounting for $1.8 billion or 32 percent of the total.

Real estate investment trusts (REITs) led the way in total acquisitions this year, accounting for 39 percent of total sales, followed by private capital at 29 percent, institutional investors at 23 percent and foreign investors at 4 percent.

Significant property sale transactions this quarter included the acquisition of the newly developed Columbus Square complex for $630 million. UDR, a Colorado-based multi-family REIT partnered with MetLife to purchase the complex. Also completed this quarter was the recap of 666 Fifth Avenue. Vornado Realty Trust purchased a 49.9 percent stake in the office building from the Kushner Companies.

RETAIL
The Manhattan retail market performed strongly through the first quarter, building on momentum from 2011.

The first quarter marked another milestone for Fifth Avenue north of 49th Street, and for the Manhattan retail market in general, with the reported lease by Mac Cosmetics at 689 Fifth Avenue for a taking rent approaching $3,000 per square foot. The cosmetics company, a division of Estee Lauder, signed a lease for 1,402 square-feet, for a store previously occupied by Elizabeth Arden. On Fifth Avenue south of 49th Street, momentum was equally evident as asking rents have increased by 27 percent year-over-year to $875 per square foot, exceeding peak asking rents of $743 per square foot in 2008.

Times Square has seen the largest increase in asking rent year-over-year of all the retail corridors tracked. Asking rent has increased by $1,210 per square foot since last year, which is an increase of 160 percent. Times Square featured the largest retail lease of the first quarter, with Broadway 4D signing a lease for 30,000 square feet at 217 West 42nd Street. Cushman & Wakefield represented the tenant in this transaction.

In 2011, SoHo leasing activity witnessed a resurgence of fashion and luxury commitments with notable leases to Tiffany, Stella McCartney, Balenciaga, and Versace, to name a few. The traditionally strong SoHo market has experienced a 26 percent decrease in inventory to a 6 percent availability rate over the past year. This represents the lowest availability rate since Cushman & Wakefield began tracking the market in the first quarter of 2006 and a historical low for SoHo as well.

The Madison Avenue corridor, stretching from 57th Street to 72nd Street, has seen an increase in asking rents of 26.8 percent year-over-year to $1,037 per square foot, which represents two consecutive quarters where asking rents exceeded $1,000 per square foot, the first time since the third and fourth quarter of 2008.

In the Upper West Side corridor, rents increased by $25 per square foot, up 8.3 percent year-over-year and the availability rate decreased by 0.6 percent. Since the fourth quarter of 2011, rents have increased by $27 per square foot, up 9.0 percent. Community Board 7's retail zoning proposals, which would control storefront sizes along the Upper West, is being closely monitored. The Board has proposed to rezone sections of Broadway, Columbus and Amsterdam Avenues. If the plan is passed, it would affect 77 block fronts each on Amsterdam, Columbus and Broadway north of West 72nd Street.

The Third Avenue corridor, which stretches from 57th to 86th Street, has made substantial progress to absorb the higher availability rates of the past three years. Availability has decreased by 44 percent, now standing at 6.4 percent down from 11.4 percent. Leases to Anthropologie, TD Bank, and Pier One, among others, were welcome additions to the avenue.

The new corridors being added to Cushman & Wakefield's coverage includes Flatiron, which had a first quarter asking rent of $263 per square foot and a 3.5 percent availability rate, Meatpacking District, with an asking rent of $300 per square foot and a 16.6 percent availability rate, and Lower Manhattan, with an asking rent of $205 per square foot and an average availability rate of 12.2 percent.

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