City Office Market To Reach High in 2007

The Manhattan office market will reach record heights early this year, following soaring rents and declining vacancy rates in 2006, real estate analysts say.

Along with a strong residential real estate market, a construction boom across the five boroughs, and billions in public funds committed to regional infrastructure and transportation projects, the city's robust office market is another sign of New York's dynamic local economy.

Last year, average asking rents for office space in Manhattan increased nearly 25% to an average of more than $50 a square foot a year, and Manhattan's vacancy rate declined to 6.7% from 8.4% at the end of 2005, according to a report released yesterday by a commercial brokerage, Cushman & Wakefield.

A vice president of Cushman & Wakefield, Joshua Kuriloff, said a decline in available space and a scarcity of new building sites would translate into higher prices.

"We are forecasting a continuation of an unprecedented rise in rents, at least through 2007," Mr. Kuriloff said.

In the last strong commercial real estate cycle, the second half of 2000, the Midtown office market topped out with average rents for the best office space in the mid-$60s range. Analysts say that level could be surpassed in the first quarter of 2007.

The chief operating officer for Cushman & Wakefield in New York, Joseph Harbert, presented the market data at a breakfast in Midtown yesterday.

"It's a good story, unless you are a tenant. We are clearly in a landlord's market." Mr. Harbert said. "When is the top of this, and when will it come down? The answer is, we don't know."

Last year there were 41 leases signed for more than $100 a foot, more than triple the number signed in 2005, according to Cushman & Wakefield.

In Lower Manhattan, leasing activity increased 64% in 2006 and asking rents jumped more than 25%. The largest office lease of the year was Moody's 589,125-squarefoot lease at 7 World Trade Center.

New York City ranks seventh among major cities worldwide in cost of commercial space, according to Cushman & Wakefield.

"We are still cheaper than other business centers around the world," Mr. Harbert said.

On the strength of sales of several high-profile Midtown office buildings at record prices, the total sales of commercial buildings in Manhattan in 2006 rose about 50% to $30 billion, more than three times the total sales in 2004, the report said. Private investors accounted for $18.5 billion in sales, and foreign investors accounted for 15% of the volume.

A managing director for Cushman & Wakefield, Kenneth Mc-Carthy, said the spike in prices reflects a sharp increase in corporate profits, which he said have doubled since 2002. Mr. McCarthy said the success of the financial services industry and an increase in mergers and acquisitions are driving today's office market. Financial service companies accounted for about a third of the leasing activity in 2006, according to the report.

Next year, the only large commercial office building planned to open is the New York Times building on Eighth Avenue, and it is already more than three-quarters pre-leased.

Market data with similar findings were released recently by commercial brokerages Jones Lang LaSalle and CB Richard Ellis.