High Midtown Rents Forcing Business Downtown

High office vacancy rates in Lower Manhattan are quickly becoming a thing of the past, as businesses pinched by high rents in Midtown are snatching up office space in the cheaper, growing downtown market.

The vacancy rate for downtown dropped five points in the past year, to its current rate of 6.3%, according to a quarterly report released yesterday by the brokerage firm Cushman Wakefield.

Rents in Midtown are up more than 30% from a year ago, fetching an average price of $75 a square foot for high-end, class A office space, with numerous leases signed for more than $125 a square foot. High rents have also caused a flurry of office building sales this year.

"These are historic increases in prices," the COO of Cushman Wakefield for the New York region, Joseph Harbert, said.

While numerous businesses are still willing to shell out a premium for the cachet of a Midtown address, brokers say the prices are too high for many midsize businesses, which can look southward to find rents at two-thirds the cost.

"It's really just the smaller tenants that are getting squeezed out," a senior vice president of research at the brokerage firm Studley, Steven Coutts, said.

Downtown has undoubtedly been the main beneficiary of Midtown's high rents, as a growing number of businesses are adding to the financial district's escalating momentum.

"Last year was really a turning point in Lower Manhattan," a vice president at the Alliance for Downtown New York, Nicole LaRusso, said, referring to a secured commitment and funding for the new World Trade Center.

Throughout Manhattan, real estate experts say office rents will likely continue to rise, with new jobs fueling increased demand and the construction of new office buildings failing to keep pace, at least until developments on the West Side and at ground zero are completed.

"I think the only barrier we have in Lower Manhattan is having space to put everyone," Ms. LaRusso said.

The strong office market led to a substantial increase in office building transactions: More than $34.1 billion in commercial real estate was sold during the first six months of 2007, according to Cushman Wakefield. The number was just shy of the record-high $34.7 billion sold in all of 2006.