New York: lowest vacancy rates for four years – lease rates on the increase

19 Oct, 2006, Frankfurt

At the end of the third quarter of 2006, New York’s office space market recorded the lowest vacancy rate for four years. The vacancy rates in Midtown and Midtown South lay below 6.5% and in Manhattan and Downtown 7% (compared to 9.6% for the same period in 2005) and 9.1% (down 2.1% from midyear 2006) of office space was vacant.

According to international real estate consultancy organisation Cushman & Wakefield (C&W), the continual decline of the vacancy rate has led to higher leasing charges. In the previous quarter, gross lease rates in Manhattan rose to an average of $41.12 per m² per month (compared to $38.98 per m² per month at the end of the second quarter). The greatest increase was recorded in Midtown where gross lease rates for class A properties hit an average of $54.46 per m² per month (compared to $48.37 per m² per month in the same quarter in 2005).

In New York, the highest gross lease rates remain at over $89.70 per m² per month ($100 per square foot per year). This year, 31 lessees paid such rates. Joseph R. Harbert, COO for C&W’s New York Metro region explained, “While such levels had previously only been achieved in the Madison and Fifth Avenue submarkets, this year lease contracts of this magnitude have also been concluded for office space in buildings on the East Side, on Park Avenue and in the Grand Central submarket. It is also notable that the office space areas being leased are of considerable size: there were nineteen cases of over 930 m² and seven cases of over 1,900 m² of office space being leased.”

The intensive leasing activities of the previous quarter have led to Manhattan’s lowest vacancy rate in five years. Since January, around 200,000 m² of office space has been absorbed in Manhattan, despite the 158,000 m² of space which came on the market for the first time at the start of the year. 372,000 m² of office space has already been leased in Downtown this year – compared with 316,000 m² in 2005.

The office space supply is running low. Lessees who are looking to expand and are interested in spaces with good amenities have few remaining choices. The limited expansion opportunities in Manhattan have caused some lessees to turn their sights to the class A properties in Midtown. A total of around 391,000 m² was leased in Midtown this year. However, only two new class A office buildings are set to be completed in this area over the next 18 months and over 85% of the office space in them has already been pre-leased.

Harbert stated, “It is going to become increasingly difficult to find suitable offices, especially for lessees looking for large spaces. The ten largest leases this year have all been in excess of 18,500 m². However, there are very few spaces of this size left. There are currently at least 16 lessees who require over 23,000 m² of office space but only seven such spaces available on the market.”

Investor demand for Manhattan office buildings

By the end of the third quarter of 2006, $14.3 billion worth of investments had been made in Manhattan real estate (up from $12 billion last year). Joseph R. Harbert commented, “With more than $16 billion of investments already under contract, we are clearly on course to beat last year’s record investment level of $20.9 billion”.

Manhattan office buildings are actively sought by investors, accounting for 62% of all real estate investments. Residential properties accounted for 12.7% of the investments, down 11.8% from the previous year. C&W attributes this to the positive market situation in the office market, which has turned investors’ sights towards office spaces.

With 42% of investments, private capital dominates the investment market. REITs have also established a strong footing as investors, accounting for 30% of investments such as Equity Office Properties' purchase of 1540 Broadway. The proportion of foreign investments – such as Istithmar’s purchase of 280 Park Avenue – has risen to 13.9% (compared with 7.4% last year).

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