C&W: downtown office market bouncing back: major tenants head for Lower Manhattan as midtown tightens further

Real Estate Weekly, April 13, 2005

The Downtown Manhattan office market has bounced back to a three-year low at the end of the first quarter, according to New York-based Cushman & Wakefield, the world's largest privately held commercial real estate services firm.

Downtown Manhattan vacancies fell to 12.3 percent from 13.7 percent at the end of last year.

That represents the lowest vacancy downtown since the first quarter of 2002, when the vacancy rate stood at 11.9 percent.

Ken Krasnow, executive managing director and head of Cushman & Wakefield's New York offices, attributed the news to three major leases Downtown during the first quarter, which he said "reenergized the market at the best possible time--just when it appeared to be losing some hard won momentum."

He pointed to the 328,000-square-foot lease for the law firm Fried Frank Harris Shriver & Jacobson at One New York Plaza, the 235,000-square-foot lease for the Securities and Exchange Commission at Three World Financial Center and the 192,000-square-foot lease for the longtime New York printer Bowne & Co. at 55 Water St.

According to Mr. Krasnow, the transactions were three of the five largest in all of Manhattan during the first quarter.

In midtown and midtown south the vacancy rate declined to three and three-and-a-half-year lows, respectively, during the first three months of 2005, to 9.8 percent in midtown and 9.9 percent in midtown south.

The vacancy rate for Manhattan overall also fell to its lowest point in three years, to 10.4 percent from 11.0 percent at year-end.

Overall absorption, which measures the change in space occupied over a given period of time--including sublease space--measured positive 5.8 million square feet in Manhattan overall, including 2.4 million square feet downtown.

Positive absorption figures reflect that more space has been leased or removed from the market during a given period of time than has been vacated or added to the market.

"At the end of last year I could cite very positive leasing trends in midtown and midtown south, but downtown started falling behind," Mr. Krasnow said.

"Today we've seen major commitments by a variety of companies and industries in downtown, midtown and midtown south that demonstrate business growth and investment."

Renewals and expansions continued to be a major trend, according to Mr. Krasnow, as companies sought to lock-in favorable rental rates before market rents trend significantly upward.

Average asking rents for office space in Manhattan jumped up to $40.28 per square foot at the end of the first quarter, compared to $39.55 at the end of 2004, which represented a five-year low.

Downtown's rental rate continued to fall, to $31.03 from $31.55 at year-end.

According to Mr. Krasnow, average asking rents downtown have continued to decline as large blocks of premier space have been removed from the market, and owners have also priced available space to compete with comparable properties in midtown and midtown south.

At the end of the first quarter, the spread between asking rents in midtown and downtown reached its widest margin ever, at $16.10 per square foot.

OFFICE MARKET STATISTICS BREAKDOWN

MANHATTAN       1Q '05   4Q '04   3Q '04   1Q '04

Total Vacancy   10.4%    11.0%    11.4%    12.2%
Sublease Vac.    2.4%     2.5%     2.6%     3.1%
Overall Rent    $40.28   $39.55   $40.51   $40.06

DOWNTOWN        1Q '05   4Q '04   3Q '04   1Q '04
Total Vacancy   12.3%    13.7%    12.7%    12.9%
Sublease Vac.    2.7%     2.8%     2.5%     2.5%
Overall Rent    $31.03   $31.55   $32.16   $33.68

MT SOUTH        1Q '05   4Q '04   3Q '04   1Q '04
Total Vacancy    9.9%    10.2%    11.2%    13.0%
Sublease Vac.    1.0%     1.5%     1.6%     2.4%
Overall Rent    $31.53   $31.34   $30.66   $31.04

MIDTOWN         1Q '05   4Q '04   3Q '04   1Q '04
Total Vacancy    9.8%    10.1%    11.0%    11.8%
Sublease Vac.    2.7%     2.6%     3.0%     3.6%
Overall Rent    $47.13   $45.98   $47.04   $45.61

Average asking rents for office space in Manhattan
jumped up to $40.28 per square foot at the end of the
first quarter, compared to $39.55 at the end of 2004,
which represented a five-year low.