Office vacancy rates may be higher due to hidden space, report says

Real Estate Weekly, May 28, 2003

Is the Manhattan office market in even weaker condition than its high vacancy rates indicate?

The latest quarterly market report from CRESA Partners LLC says vacancy rates in some submarkets may be 20% to 37% higher than most surveys show if two extra factors are taken into account: space that is leased but unoccupied, and space that is occupied but available for lease. Neither aspect of so-called "hidden space" is usually reflected in market surveys.

"These issues highlight additional potential vacancy and could be a significant brake on any market recovery," says the report. CRESA Partners is one of the nation's leading corporate real estate advisory firms.

Commenting on the report, Marcus Rayner, principal in CRESA's New York office, says it suggests that tenants "have an increasingly broad range of choices and options under favorable terms, especially if they will consider shorter-term leases. On long-term deals, owners are maintaining a tougher negotiating position."

The report also notes that the gap in asking rents between direct and sublease space is as much as 40% in. some submarkets. "Tenants disposing of space need to re-assess pricing on a monthly basis to remain competitive," according to. the report. "The ability to be flexible during negotiations has never been more important."

CRESA's report for the first quarter of this year indicates some sign of firming in Class-A downtown space, with the vacancy rate declining nearly a percentage point, compared with the last quarter of 2002, to 11.77% (not including "hidden space" factors).

Average asking rents rose by 10 cents, to $34.52. However, the total Class-A downtown vacancy rate, including sublease space, remains at a high 16.15%.

The Class-B downtown vacancy rate continued to rise in the first quarter, up more than three-quarters of a point to 14.10%. Average asking rents fell by more than a half-dollar, to $27.76. The total Class-B downtown vacancy rate is 16.8 1%.

In midtown Manhattan, Class-A average asking rents declined by nearly $2, to $49.78, as the vacancy rate rose nine-tenths of a point to 8.8%. Total available space is at 11.75%. Class-B average asking rents dropped by 34 cents, to $34.56, while the vacancy rate rose 66 points to 9.93 Total available Class-B space is 12.24%.

In midtown south, the combined vacancy rate for both classes rose modestly to 11.88%, while average asking rents declined nearly $1, to $30.02. Total available space is 14.22%.