Office Vacancies Rise, Commercial Rent Growth Slows
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Manhattan’s commercial real estate market appears to be slowing just three months into the year, as office vacancies rise and building owners see only modest increases in rents.
Across the city, the average asking rent on commercial property increased 4.6% in the first quarter of this year, to $72.07 a square foot, according to the latest report by the real estate firm Jones Lang LaSalle.
Still, the latest growth in commercial property rents is considerably slower than the growth last year.
Average rents on high-end, Class A buildings, for instance, rose 8.2% between year-end 2007 and the first quarter of 2008. That’s compared with a 25.3% increase over the same period between 2006 and 2007. Similarly, rents on smaller, Class B buildings posted an increase of just 1.4%, compared with the 31% rise at the beginning of the previous year.
Researchers attributed the slowdown in rental rate growth in large part to the lagging economy and a broader slump in the national real estate market.
“Given the current economic climate, it is not unexpected for rents to begin leveling off,” the director of research at Jones Lang LaSalle, James Delmonte, said in a statement. He is forecasting “relatively flat rent growth throughout New York for the remainder of the year.”
As rent growth slows, office vacancies are on the rise across New York City, driven partially by lagging job growth in the private sector, the report found.
Citywide, the office vacancy rate increased 0.6 percentage points in the first quarter of 2008, to 7.7%. To soften the blow of higher vacancies and lower rents, many building owners are becoming increasingly generous in the concessions they give to tenants, including more so-called free-rent — it can span as long as six months. In some cases, owners are even shouldering the costs of installing new bathrooms or upgrading heating systems and performing demolitions in order to secure reliable tenants.
Despite efforts to lure and retain tenants, however, many experts expect a higher quantity of sublease space to enter the market in 2008.
