Manhattan vacancy rates inch downward

Real Estate Weekly, Nov 10, 1993

A recent survey of third quarter market statistics, completed by CB Commercial Real Estate Group, Inc., has found that the Manhattan commercial real estate market continues to slowly improve in the Midtown districts. Downtown continues to be a weak market with limited improvement in the short-term.

"The Manhattan commercial real estate market is slowly recovering, with the Midtown North district leading the recovery," says Steven A. Swerdlow, executive vice president and managing officer of CB Commercial's New York office. "The third quarter figures indicate a continuation of the trend that has been apparent since the beginning of the year." The Midtown (both North and South) vacancy rate currently stands at 13.22 percent. One year ago, the comparable rate was 14.45 percent.

The Midtown North district, comprised of the east-west area bounded by 42nd Street through 59th Street, continues to show the greatest strength. In the past year, the vacancy rate decreased by over one and one-third percentage points to 13.01. The district experienced positive net absorption of over 615,000 square feet during the third quarter.

"Many large-blocks of Class-A office space in the Midtown North area have been leased over the past twenty-four months," explains Swerdlow. "We expect the district to see continued improvement through the fourth quarter and beyond due to the continued economic recovery."

The current situation bodes well for owners who have been forced to contend with offering rent concessions and work letters to prospective tenants, effectively pushing net effective rental rates to minimal figures. "Landlords are now regaining some bargaining power, since there is no new construction and increased demand for existing Class-A space," says Swerdlow.

The Midtown South district, encompassing the east-west area between 14th and 42nd Streets experienced a one percentage point vacancy decrease over the past four quarters. The vacancy rate currently stands at 13.64 percent and runs contrary to the trend of decreasing vacancy that had been occurring in the district since the third quarter of 1992. The district had negative absorption of just over 250,000 square feet during the third quarter.

"There are two primary reasons for the slight Midtown South vacancy increase," explained Swerdlow. "Since rental rates have decreased city-wide, many tenants have upgraded the quality of their leased offices by moving to Class-A buildings in the Midtown North district." Companies moving from Midtown South to Midtown North include Lehrer McGovern Bovis, The Economist, Smith Barney, The Lintas Group and Capital Cities/Fairchild Publications.

In addition, many service-oriented businesses headquartered in Midtown South are currently downsizing, resulting in a vacancy rate increase. "We predict that as conditions in Midtown North improve, Midtown South will recover and continue to attract tenants in the advertising, public relations, publishing and travel fields," says Swerdlow.

Downtown Market

Continues to Suffer

"The Downtown market represents the biggest challenge to overall improvement in the Manhattan office market," explains Philip R. Sprayregen, managing director, CB Commercial. "One quarter the figures improve, only to regress the following quarter." The current vacancy rate stands at 21.77 percent - a marginal decrease from the rate one year ago, when the vacancy rate was 21.86 percent. Nearly 125,000 square feet of available space was added to the Downtown market during the third quarter of 1993.

"The Downtown market recovery will occur over several years and be building-specific, requiring innovative marketing strategies and adaptation of space for non-financial firms," predicts Sprayregen.

The Downtown market continues to be the most difficult area in the Manhattan commercial real estate market. The continued trend of down-sizing and consolidation within the financial services industry has had a negative effect on office occupancy rates. Another reason for high vacancy rates in the district is attributed to the stock of older buildings lacking large floor plates and requiring extensive technological improvements. In addition, the large number of financial firms taking advantage of lower rental and tax rates in New Jersey for back-office operations has resulted in decreased demand.

"Overall, CB Commercial is cautiously optimistic about the state of the Manhattan commercial real estate market," says Swerdlow. "Midtown North will continue to drive the recovery of Manhattan's commercial real-estate market. Midtown South will attract creative service and start-up businesses and Downtown will continue to languish."