Office Rents Soar in Manhattan as Vacancies Plunge

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The New York Sun

The vacancy rate for the Manhattan office market has reached its lowest level since before September 11, 2001, and average rents are approaching all-time highs, according to a quarterly report released yesterday by a leading real estate firm.

The growing scarcity of office space and the strength of the commercial real estate market is a sign to some analysts that the demand to work in New York is greater than ever.

The chief operating officer for Cushman & Wakefield in New York, Joseph Harbert, said office space should become increasingly scarce, pushing office rents above their all-time highs in the next 9 to 12 months.

“We have never seen this kind of pricing before, a lot of deals are getting $70, $80, $90 a foot,” Mr. Harbert said. “We think something fundamentally different is going on in this cycle.”

Mr. Harbert said that at the peak of the last strong commercial real estate cycle, in the second half of 2000, the market topped out with average Manhattan rents for the best office space in the mid-$60 range. He said that could just be just the beginning this time around, at an earlier point in the cycle and when many recent leases have exceeded $100 a square foot.

Real estate analysts say some of the decrease in vacancy rates is because the supply of office space has declined because new construction has not kept pace, particularly downtown, where office space has been converted into apartments. But they also say new jobs are driving the demand, and that expanding companies are leasing now, fearing that prices will continue to rise.

A director of Real Capital Analytics, Dan Fasulo, said he has heard of landlords sitting on vacant office space recently in a gamble that it will bring more in the near future, as rents continue to climb.

“This type of market is the type of market that compels tenants to act,” Mr. Fasulo said. “They are getting nervous that if they wait too long, they will get stuck with even higher rents.”

Mr. Fasulo said if the market stays strong and prices continue to rise, New York could be a victim of its own success. He said “bottom-line conscious” companies could look increasingly outside Manhattan, including downtown Brooklyn, Jersey City, and Long Island City in Queens.

“If New York cannot grow its inventory of office space, the price point will get to a place where tenants will consider other alternatives,” he said.

The CEO of Newmark Real Estate, Barry Gosin, said that falling vacancy rates are a product of recent job growth and companies leasing space for planned expansion, but he said he does not expect the trend to continue.

“I personally think it is going to level off. I think the economy is slowing and prices are too high. There will be a resistance to the pricing,” Mr. Gosin said.

The last quarter was the most active leasing quarter in over two years, according to the report by Cushman & Wakefield. Space is most scarce in Midtown, the city’s largest business district, where the vacancy rate dropped to 6.5% and the average rate is approaching $60 a square foot. For all classes of office space, the overall Manhattan office vacancy rate declined to 7.0% from 9.6% at this time last year, as the average prices rose to nearly $46 a square foot a year.

In Lower Manhattan, the vacancy rate fell to 9.1% from 11.2% last quarter, largely because of Moody’s lease for 600,000 square feet in developer Larry Silverstein’s 7 World Trade Center, the biggest lease of the year so far.

The strong office market has been enticing developers backs towards building commercial office space after several years without significant new developments. Eleven commercial buildings are in construction in 2006, up from eight last year, according to a recent report by the New York Building Congress.

Last month at a conference about economic development, the president of the Real Estate Division of Trinity Church, which owns a lot of space downtown, Carl Weisbrod, said that the changing office market is affecting developers’ calculus.

“Every site in New York was worth more as a residential site than as a commercial site in the last ten years,” Mr. Weisbrod said. “Now the market is changing.”

Those developers who are now leasing prime office space are said to have timed the market perfectly. Developer Douglas Durst is building One Bryant Park, a 54-story skyscraper on the corner of 42 Street and Sixth Avenue that will house Bank of America. The first tenants are not scheduled to move in until the beginning of 2008, but 90% of the space has been leased, according to a spokesman for the developer. Many of the rents are said to be well over $100 a month.

Similarly, the New York Times building nearing completion across Eighth Avenue from the Port Authority Bus Terminal is said to be 85% leased.


The New York Sun

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