Spring market report: Extremely robust

Real Estate Weekly, June 7, 2000

According to Jones Lang LaSalle's first quarter 2000 market report, leasing activity in New York City's office market remains extremely robust despite the lack of available supply. A total of 4.2 million square feet of space was absorbed during the first three months of the year, causing Manhattan's vacancy rate to fall to 3 percent and the overall average gross asking rental rate to spike by 13 percent. The strong job creation and economic growth that the City enjoyed throughout 1999 has continued into 2000 with nearly 21,200 private sector jobs created during the first three months of the year. This is primarily due to the vibrancy of the new media sector and the service industries associated with those businesses.

"Virtually all the positive net absorption in Manhattan during the first quarter took place in the Class. A sector," explained Frank Doyle, Senior Vice President at Jones Lang LaSalle. "This is contrary to the trend of the last several quarters when the bulk of absorption took place in Class B buildings as a result of new companies seeking more affordable alternatives to Class A space," continued Doyle. According to Jones Lang LaSalle statistics, the average overall asking rent among Class A and B buildings spiked during the first quarter and now stands at $52.10 per square foot.

Midtown's overall vacancy rate dropped to 2.4 percent, while the Class A vacancy is currently at 2 percent. The Grand Central submarket, where a number of large leases were signed by new media companies, reported the highest level of net absorption throughout Midtown markets. The Plaza District, Manhattan's most prestigious office neighborhood, continues to have the most expensive Class A asking rents at $73.60 per square foot. In certain trophy properties, rents have reached $100 per square foot. The overall average asking rent in Midtown is now $57.44 per square foot, an increase of 29 percent over one year ago when it was $44.45 per square foot. A year ago there were 26 spaces of 100,000-square-feet of contiguous Class A space; now there are just 12.

In the downtown market, the vacancy rate dropped to 4.3 percent. Most of the 1 million square feet of net absorption was in Class A buildings, much of it in the Financial and Insurance Districts. The Downtown market's average asking rent is $40.33 per square foot, an increase of 27 percent from one year ago. Over the past year, 6 blocks of Class A space 100,000 square feet or greater were absorbed; only 7 remain.

Most of the building sales during the first quarter involved Class B buildings.

Investors sought to capitalize on value-added opportunities because the Class A market, where most buildings have stabilized, has less upside potential. Myriad Class B and C buildings throughout Manhattan have already been repositioned to take advantage of the strong demand for office space and have become hot spots for Internet start-ups and other new media companies. Several buildings in Midtown's Garment District/ Penn Station submarket and in Downtown's Financial District traded hands in the first three months of the year, with a number of them trading at about $ 100 per square foot.

There are approximately 12 million square feet of projects under construction, planned or proposed in Midtown. To date, most of the space under construction has been pre-leased, as banks remain wary of financing speculative development. Several speculative projects have been announced. but the total space of the projects is about 1 million square feet, a negligible amount in the Midtown market. It is expected that additional project announcements will be made, pending tenant commitments. The focus of Manhattan development has been Times Square, although new development sites are located throughout Midtown. Companies that have made commitments to anchor new buildings include Ernst & Young; Bear, Steams; Morgan Stanley; Time Warner and Reuters. Other companies looking for new headquarters include CIBC, the New York Times, and Bloomberg, L.P.

"The new media industry has emerged as a new economic engine for New York City, far outpacing employment growth in the financial services sector," stated Doyle. "New media businesses are drawn to New York because of its competitive advantage in the disciplines of media, graphic design, software development, the Internet, telecommunications, advertising and marketing, all of which are important to developing services and business models for the New Economy. Also essential for new media companies is the availability of capital from New York's commercial and investment banks, as well as venture capital funds. Finally, New York offers new media companies access to a highly talented labor pool."

As a result of the strength of New York City's emerging new media and technology- based industries, as well as the health of financial services, law and other traditional businesses, much of Manhattan's conventional office space has been absorbed. As a result, tenants in search of space have been driven to neighborhoods and buildings previously "off the map." Such buildings include 111 Eighth Avenue and the Starret Lehigh Building, both of which were built in the 1930's along Manhattan's West Side as mammoth shipping warehouse/distribution facilities. Companies that have led the way to these new neighborhoods include Internet start-up companies in search of affordable space and new telecommunications companies that are involved in New Economy activities such as hosting other companies' Internet servers and offering enhanced communications services.