By Daniel Geiger
Manhattan asking rents have begun to bounce back slowly from precipitous declines during the recession, but leasing executives at the real estate services company CB Richard Ellis say that segments of the market have begun to tighten at a faster pace than the overall statistics indicate.
“Some of the assumptions at the macro level about how the market moves do not apply equally to the markets within the market,” said Matthew Van Buren, an executive managing director at CBRE who oversees the company’s midtown brokerage operations. “Herein lies some very interesting information. At this moment in time there are specific parts of the market that are moving much faster than other parts.”
The firm, which held a breakfast this morning in its midtown headquarters with the media to discuss data and trends from the first quarter, said that there is a dearth of available big blocks of office space in midtown and high-end offices with impressive views. The lack of options has created a landlord’s market in these categories by pushing up competition and rents, even as higher vacancy levels across midtown have prevented many owners from gaining the same traction in lease negotiations.
CBRE executives said that about 25 tenants from the financial, law, and media industries have been searching for large spaces, a category usually defined as bigger than 250,000 s/f. CBRE wouldn’t name the firms specifically, but said that the firms constituted roughly seven to nine million s/f of demand. According to CBRE statistics, big tenants typically renew their existing spaces rather than relocate about half of the time. Even if that rate of renewal holds true for this upcoming group of space takers there is still a shortage of options.
CBRE said in midtown there were only about nine appropriately sized blocks for very large users. Paul Myers, an executive vice president at CBRE who led the company’s presentation this morning with fellow broker John Maher, said the number of potential spaces shrank to “between two or three spaces” for many of the tenants when their specific space needs were factored in.
Manhattan’s high end market is also strong. Myers said that in midtown, only 2.7% of space above the 25th floor in buildings was available. In midtown’s 25 most expensive skyscrapers, that number constricted even more, to about a 1% vacancy rate for spaces on the 25th floor or higher. The overall availability rate in midtown, which measures current vacancy with what is expected to be empty within the next year, was at 12.3% at the end of the first quarter according to CBRE data. Manhattan wide the availability rate is 12.4%.
“If you’re a landlord with space above the 25th floor, you’re going to outperform the market,” Myers said. “If you’re a tenant who thinks the 12% availability applies to you on a top floor in a top building, you’re actually not correct, it’s really a landlord’s market in that equation.”
In midtown, average asking rents were up according to CBRE data, rising to $58.14 per s/f in March from $55.44 per s/f a year ago and $57.97 per s/f at the start of the year. In addition, landlords were increasingly able to achieve the rental rates they asked for, a sign that the market is tightening. According to CBRE taking rents in midtown were 87.5% of the asking rate on average, up from 84.3% a year ago. Vacancy was 8.4%, down from 10.2% a year ago and the availability rate was 12.3%, below a 14.6% figure at the end of the first quarter last year.
The number of deals done at rents at or above $100 per s/f, a rate typically reserved for midtown’s best buildings, was on pace so far to match 2006, a year during Manhattan’s real estate boom. In the first quarter, 13 deals were signed at or above $100 per s/f, a far faster pace of high end deal making than during the depths of the recession. In 2009, only 17 deals were signed at that rate and last year 19 upper tier transactions were completed.
“Well known buildings have begun to increase rents and test the far end of the market,” Maher said. “At a building like 510 Madison Avenue, rents are being achieved at or well above pro forma with a good volume of transactions.”
In Lower Manhattan, an area of Manhattan hit hard by the recession and the diminished leasing activity that followed, signs of improvement were also evident. Average rental rates rose to $39.22 per s/f from $38.81 per s/f a year ago and $38.01 per s/f at the start of the year.
CBRE said that the weakest part of the market citywide was among tenants 10,000 to 50,000 s/f in size, a range apparently flush with openings.
“If you wanted to see large blocks in midtown I could take you on a tour and have you back in time for a nice lunch,” Myers said. “If you’re a 30,000 s/f tenant, I could show you space until you dropped.”
Myers and Maher said that the high end leasing market and the big block spaces had a potent psychological effect on tenants and landlords even though those categories comprise a minority of the city’s office space. As deals get done in those segments, it could have a positive impact on rental and vacancy rates market wide. CBRE also said that the lack of big spaces in midtown could push tenants to the array of large openings downtown, strengthening that market.
“It’s fascinating,” Maher said. “People want to know about the deals at the top end of the range even though they represent a small portion of deals in the city. Along with big blocks, small, high end deals drive psychology.”