No worries over city's lackluster vacancy rate

Real Estate Weekly, April 7, 2004 by Elaine Misonzhnik

Though the first quarter of 2004 showed no great improvement in Manhattan's overall vacancy rates, most brokerage firms are not worried.

The stability in market numbers comes from tenants' reluctance to sign leases before expected expansions, they say, not from a weak economy or another round of downsizing.

According to a Newmark office market report: "Companies across all industries are cautiously optimistic about their near-term outlook and are unwilling to commit to more space than they immediately require, opting for small amounts of expansion with shorter terms."

At the same time, three recent large deals in the midtown Manhattan sub-market are viewed as a sign of a near rebound. According to CB Richard Ellis, PricewaterhouseCooper's 789,000 s/f lease at 300 Madison Ave., Kramer, Levin, Naftalis & Frankel's 283,000 s/f lease at 1177 Ave. of the Americas and Fairchild's Publication's 234,000 s/f lease at 750 Third Ave. helped bring down midtown's availability rate for the first quarter.

Of course, two of the deals were subleases, but most brokers feel that the amount of quality sublease space in Manhattan is running out, making it all the more likely that direct leases will come to the fore in the second quarter of 2004.

According to David Falk, principal of Newmark, "In the sublease market, the amount of inventory is shrinking. What is left now is unimproved space, which is looked at much more closely than before because the tenants have much more choice." But though Falk remains optimistic about the near-term future, he doesn't think that the economy has improved enough to guarantee low vacancy rates any time soon.

"The prediction of the amount of jobs that Manhattan companies would be adding is not sufficient enough to change an availability rate that has stayed steady for a number of months," he said. "I don't believe that in [the remainder of] 2004 you will see a much better market than you see in March."

At the same time, Frank Doyle, director of mid-town leasing with Jones Lang LaSalle, insisted that leasing activity has picked up significantly since 2003.

"There is a general feeling that the market has bottomed out and is now on the rise. Tenants are looking to sign leases right now," he said. "For example, this week we are getting four floors back at the Citi Group Center in midtown [at 153 E. 53rd St.]. I already leased one floor and have multiple offers on the other three." Gregory Knoop, first vice president with CB Richard Ellis, cautions people against putting too much stock in market reports. "If you look at two months worth of statistics and then compare it to a five year average that would be an empirical observation, but I don't feel that it's enough to give a full picture," he said. "The deals in midtown are all very significant because they show corporate America's confidence in the Manhattan marketplace."

The brokers were equally unconcerned about the downtown market posting a slight increase in availability in the first quarter. "We've seen tenants like New York Life and Cadwalader renew their leases, which shows that they have confidence in downtown Manhattan," said Knoop. "And then when you couple it with the transition of the area, you begin to realize that it is becoming a live/work environment. There is a lot more discussion of it today than in August of 2001."

"In Manhattan, midtown has always been the location of choice, it always leads the recovery," said Doyle. "Downtown will come back, it just always lags behind."

According to the CBRE availability rate in down-town for 2004 averaged 15.4%, in midtown 13% and in midtown south 12.4%.