Downtown markets continue dramatic recovery

Real Estate Weekly, August 12, 1998

At 11 percent at the end of the second quarter of 1998, the vacancy rate has decreased from 15.9 percent in the second quarter of 1996, and from 13.9 percent in the corresponding period in 1997. Cushman & Wakefield noted the vacancy rate dropped from 11.7 percent in the first quarter of 1998.

"We are witnessing the proliferation of the 24-hour city: downtowns where people can both live and work. This is a driving force behind the success of our downtown markets," said Cushman & Wakefield President and CEO Arthur J. Mirante II.

Overall, 23 of 32 downtown markets Cushman & Wakefield tracks experienced vacancy rate declines during the quarter. Leasing has remained strong nationwide, with over 44 million square feet leased.

Construction

The firm reported 346,000 square feet of new construction has been completed in the first half of 1998. For the remainder of this year, 2.9 million additional square feet is expected to be completed. Last year, 1,029,760 square feet was completed.

In 1999, 2.2 million square feet is expected to be completed, and another 2 million square feet is scheduled for completion in 2000.

Vacancy Rates

The firm pointed to Midtown Manhattan, Downtown Manhattan, Fairfield County (CT), Seattle and San Jose as markets that have performed particularly well recently.

Midtown Manhattan, led by expansions in the advertising, media and business services industries, has seen its vacancy rate drop to 7.5 percent, from 8.1 percent in the first quarter. Downtown Manhattan's vacancy rate, spurred by expansion in the securities and insurance industries, decreased to 9.2 percent from 12.1 percent. Fairfield County, with financial services leading the way, dropped to 5.2 percent from 6.8 percent. Seattle, with its strong high-tech sector, dropped to 4.8 percent from 5.1 percent. High-tech has also been the driver in San Jose, where the vacancy rate decreased to 6.3 percent from 7 percent.

"There are limited opportunities for corporations seeking space because vacancy rates are low and there is no new construction," said Cushman & Wakefield Managing Director of Research Services Maria T. Sicola.

Rental Rates

Class A weighted average rental rates rose in 28 of the 32 markets during the quarter, led by San Francisco, which increased to $45.60 per square foot from $41.40. San Francisco now has the highest Class A rental rate in the nation, surpassing Midtown Manhattan, which is at $42.90. In addition to San Francisco, Downtown Manhattan and Seattle all rose by $2 or more per square foot during the quarter.

"The strong national economy is resulting in healthy demand, which combined with the lack of available product, is causing rental rates to rise," said Sicola.

Select downtown office rents can justify new construction, the company says. Among the markets Cushman & Wakefield pointed to are Midtown Manhattan, San Francisco and Washington, D.C.

Investments

Downtown Manhattan and downtown Los Angeles are two markets which have a great deal of upside potential from an investment standpoint, according to Cushman & Wakefield Director of Investment Research Janice Stanton, who noted that the recovery in Downtown Manhattan lagged Midtown, which has bounced back well in recent years. As a result, Downtown rents and sale prices are at only half of replacement cost levels.

"This gives investors the opportunity to double their money over the next few years," Stanton said. "Most of the Class A product in Lower Manhattan is 90 percent occupied, providing strong cash-flow returns and tremendous upside potential."

Los Angeles is also "a great buy," as California roars out of its long recession. "California is among the nation's leaders in growth, fueled by double digit advances in the entertainment and international trade sectors," Stanton said. "Continued growth forecasts in these industries make Los Angeles a good long-term buy."