Bolstered by a stronger-than-expected recovery in hiring, office fundamentals in New York City continue to recover rapidly, according to Cushman & Wakefield. In fact, by some metrics, the market is stronger than it’s ever been.
Asking rents for Manhattan office space reached $58.90 at the end of March, a 7.6 percent increase year-over-year. The three major submarkets—Midtown, Midtown South and Downtown—saw increases of 1.9 percent, 5.6 percent and 0.8 percent over the last quarter. Rents are up even though leasing activity slowed a bit in the first quarter. In all, 5.8 million sq. ft. in new leases were signed, 24 percent less than the 7.6 million sq. ft. in new leases signed in the first quarter of 2011. The drop comes following a year in which leasing volume overall reached 30.1 million sq. ft.—the highest total since 2000. But it is roughly in line with the 10-year quarterly average of 5.9 million sq. ft.
As a result, the vacancy rate at the end of the first quarter was 9.1 percent, down from 10.0 percent a year ago. For class-A space, the vacancy rate stood at 10.1 percent with average asking rents of $67.30 per sq. ft. Vacancies declined 0.6 percent year-over-year.
Joe Harbart, COO of the New York Metro Region for Cushman & Wakefield says.
“We have a market that is close to equilibrium. We’re about at the spot where we are switching to a landlord’s market instead of tenant’s market.”
The most significant factor contributing to the results was the fact that, according to figures revised by the U.S. Labor Department, the city saw 71,900 in new jobs in 2011—nearly double the previous estimate of 37,400 jobs. In fact, the total employment numbers reached 3.84 million—a new high for the city beating the previous record of 3.83 million in 1969. Ken McCarthy, senior economist and senior managing director with Cushman & Wakefield sees that robust pace of growth continuing and is projecting that another 93,000 jobs will be added in 2012 and 77,300 in 2013.
In fact, New York is just one of three metros in the U.S.—Washington D.C. and Houston are the others—where employment has surpassed the pre-recession peaks. The strength comes in spite of the fact that the financial sector has not expanded of late. Instead, information/media firms and professional services firms are driving much of the growth.
Going forward, that will just make the race for space in the city even more heated given that the overall supply of office buildings is not changing much. Since 1990, the amount of office space in the city has moderated between 390 million sq. ft. and 400 million sq. ft. Even with the addition of the new World Trade Center, the market will stand at 400 million sq. ft. in 2014. In that context, Cushman & Wakefield expects the office vacancy rate to drop to about 8 percent in the next two years, which will push rents higher.
In terms of leasing activity, 2011 was marked by a record number of leases of 100,000 sq. ft. or more. In all, Cushman & Wakefield counted 51 such deals. Another 13 have been signed so far in 2012, although the firm expects the pace to drop some as the year progresses. But there remains robust activity on leases between 10,000 sq. ft. and 25,000 sq. ft. In 2011, deals of that size accounted for 21.1 percent of market activity. In 2012, so far, they have accounted for 32.7 percent.
PERFORMANCE ACROSS SUB-MARKETS
By sub-market, Midtown South led the way with a 5.9 percent vacancy rate. The vacancy rate downtown stood at 9.2 percent and for Midtown at 9.9 percent.
Midtown South boasts the lowest vacancy rate of any CBD in the country. Its class-A vacancy rate is 5.4 percent and rents have risen year-over-year from $57.44 per sq. ft. to $67.52 per sq. ft. The rent is just $4.56 per sq. ft. lower than class-A asking rents in Midtown—the tightest spread ever between the two sub-markets.
The numbers are evidence that “now people look at Manhattan as a single market,” Harbart says. “If a company is looking at space, they are not just looking at Midtown or Downtown. They now embrace the city as one market.”
Downtown, the vacancy rate fell from 9.5 percent in the fourth quarter. Asking rents increased to $40.37 per sq. ft., up 1.2 percent from the fourth quarter. In Midtown, meanwhile, asking rents ended the quarter at $66.70 per sq. ft., up 2 percent from the fourth quarter.
For the top space in the city, there are deals reaching more than $100 per sq. ft. in rent, according to Harbart, although the pace of those deals this year is a bit lower than last year so far. But there have been upticks in deals in the $80-to-$90-per-sq.-ft. and $90-to-$100-per-sq.-ft. ranges.
COMMENTARY: If you are looking for statistics on the commercial office space in Manhattan, checkout Optimal Spaces. They produce very comprehensive statistics on the three major sections of Manhattan: Midtown, Midtown South and Downtown Manhattan.
Souce: Optimal Spaces
Optimal Space's Manhattan Office Market Class A vacancy rates are still high overall .
- Midtown South's vacancy rate was 3.00% at the end of March 2012, the lowest of the three sections of Manhattan.
- Downtown ended March 2012 with a vacancy rate of about 7.5% or second highest.
- Midtown ended March 2012 with a vacancy rate of about 19%, the highest of all three Manhattan sections.
- Total Class A office space had a vacancy rate of 19.7% at the end of March 2012.
- The overall vacancy rate for the total Manhattan office market declined from a high of 36% on March 2012 to 30.97% on March 2012.
As you can readily see, the Manhattan commercial office market is still in the doldrums particularly in Midtown where the vacancy rate of stood at 19% at the end of March 2012. Total Class A office space had an overall vacancy rate of 19%. That's a whole lot of empty office space. This compares favorably with parts of the Metropolitan Los Angeles Market. San Francisco's commercial real estate market has turned around completely, driven by the hot tech/internet sector.
According to Optimal Spaces, Manhattan's Class A office space available for rent will increase by 6 million square feet of new office inventory coming online the remainder of 2012. Within two years vacant Manhattan Class A direct and sublease office space will increase from 19.71 million square feet to 46.58 million square feet--an increase of 26.87 million square feet or 136.3%.
Click Image To Enlarge
As you can readily see from the above table, Manhattan Class A office vacant space will increase substantially over the next two years. Most of the increase in vacant Class A office space will be in Midtown and Downtown Manhattan. A lot of the new Class A office space will be from new building construction completions in 2012 and 2013.
- Midtown Manhattan - The forecasted vacant space for Midtown Manhattan Class A office space will increase from 14.5 million square feet in March 2012 to 28.06 million square feet in March 2014, and the vacancy rate will increase from 8.4% to 12.4%.
- Downtown Manhattan - The forecasted vacant space for Downtown Manhattan Class A office space will increase from 4.7 million square feet in March 2012 to 16.92 million square feet in March 2014, and the vacancy rate will increase from 7.7% to 14.04%.
Here's what Optimal Spaces says about the Manhattan Commercial Office Market:
"Tenants are continuing to be slow in making long term decisions, therefore leasing volumes have been quiet for the last few quarters. 6 million square feet of new office inventory wil be coming online this year. This will lead to interesting game of blink as to whether Landlords will lower their rents in order to get deals done."
"Manhattan’s slumping office market is about to be get worse, when 6 million square feet of new office space will be delivered to the market — the most since 1989."
"The unsteady economy and the compression of the financial services industry have lessened demand for office space recently. Developers point to the city’s growing tech, law and media sectors for relief, though those tenants tend to prefer using smaller space more efficiently to signing for extremely large blocks. The developers of the buildings, 1 World Trade Center, 4 World Trade Center and 51 Astor Place, say they aren’t worried because of the dearth of new construction in the years preceding the upcoming one. But the one high-profile property to be built recently, at 11 Times Square, has failed to land tenants for 60 percent of its 1.1 million square feet more than a year after opening. The success of these developments could determine how soon if other high-profile projects, like Hines Interests’ 7 Bryant Park and the Related Companies Hudson Yards, get off the ground."
The discrepancy between Cushman & Wakefield's numbers and those of Optimal Spaces are difficult to explain. Cushman & Wakefield offers a much rosier picture of the Manhattan office space market.
Courtesy of an article dated April 4, 2012 appearing in National Real Estate Investor and The New York Real Estate Report and Graphs and Statistics for March 2012 by Optimal Spaces
Comments