Commercial Rental Rates Plummet in Manhattan

The slowdown in the real estate market is finally hitting New York office space: After years of surging upward, commercial rental rates in Manhattan decreased in the second quarter, a new report shows.

Asking rent declined 2.2%, to $69.29 a square foot, while Class A rents plummeted 4.4%, to $90.65, according to Studley's second-quarter market report, released yesterday. Meanwhile, the availability rate jumped half of a percentage point, to 8.2% — nearly a full percentage point higher than a year ago. At the same time, the supply of sublet space is increasing, up 34% versus the prior quarter, to 8.3 million square feet.

This is the first time since 2005 that rents have declined and the availability rate has been so high. "What's happening this quarter is pretty significant," a senior vice president at Studley, Steven Coutts, said. "We've really seen rental rate growth begin and continue on a steady course since the third quarter of 2003. This is the first we've seen that rents have come down since then." In the third quarter of 2005 there was a minor dip in rents, but it was temporary, he said.

"We anticipate that availability will continue to increase," he said. "The question is, how quickly will it go up?"

Industry insiders for months have predicted a decline in rents in light of increasing availability, a slowing rate of transactions, and a greater willingness on the part of landlords to offer concessions to tenants. "We've been expecting this," an attorney at Loeb & Loeb, Raymond Sanseverino, said. "The concession packages have been getting better."

Cushman & Wakefield and other market reports have predicted that rents would decline, but Studley is the first to record an actual decrease. While there is a delay between market statistics and broader economic trends, as it takes time for job losses to translate to changes in office space, Studley is the first brokerage firm to see a drop in rents, as it looks at availability rates rather than just vacancy rates. Availability rates, which include all properties that are available for lease regardless of whether the current tenant has vacated the space, are a leading indicator of market conditions because it measures which properties are available for rental. Other firms largely focus on spaces that are vacant, Mr. Coutts said.

"Availability shows up on our radar before vacancies," he said. "This is a forward-looking view of the market."

The drop in rents was fueled largely by the increase in sublet supply since last quarter, Mr. Coutts said. Sublet space nearly always rents for less money than space rented directly from the landlord, he said.

"Sublease space is really fueling the decrease in rents," he said. "We're starting to see these large blocks of space come on the market as a result of firms downsizing."

The president of GVA Williams, Mark Jaccom, cited 11 Times Square and 100 Park Ave. as prominent properties that are accepting rents on lower floors below their original target of $100 a square foot.

"I think everybody's coming down 5% to 10%," Mr. Jaccom said. "It's a recession, and people are tightening their belts."

The steepest decline in rents occurred in the Plaza District, where Class A rents declined 5.5%, to $122.22 a square foot. Midtown West also showed a 5.5% decline in Class A rents, to $96.04. Mr. Coutts attributed the decreases to large properties coming on the market in those areas.

Leasing velocity totaled 6.5 million square feet, down 15.5% from last quarter and 12.7% below the historical average of 7.8 million square feet leased each quarter.