by Daniel Geiger
Manhattan leasing continued on a solid pace in the first quarter, according to data released this morning by Cushman & Wakefield, although there were some indications that the activity could be driven by pent-up demand and may taper off.
About 7.6 million s/f of space was leased in the first three months of the year, compared to about 7.5 million s/f in the fourth quarter of 2010, the most since the third quarter of 2006 when the city’s office market was in the midst of a record run-up in activity and rents.
So far, leasing this year has absorbed about 440,000 s/f of empty space in the market, pushing the vacancy rate down by about half a percentage point during the quarter to 10%. Absorption, which measures the net total added or deducted from the available stock of space, along with vacancy, are key indicators of the market’s health.
An increase in absorption and decrease in vacancy sets a positive tone for 2011, said Cushman officials.
A year ago, when Cushman executives said that the market was just beginning to recover from its low point during the recession, leasing in the first quarter totaled about 5.7 million s/f. Although the year ended with a flurry of deals, driving about 7.5 million s/f of leasing activity in the fourth quarter, 350,000 s/f was added back to the supply of vacancy in Manhattan in 2010, a telling indicator that the market was not yet strong enough to sop up all the space that was added to vacancy during the downturn.
In midtown, Manhattan’s strongest submarket, five million s/f was leased, well above the neighborhood’s average quarterly leasing total of about 3.8 million s/f. The pace of dealmaking was nearly equal to the fourth quarter of 2010 when about 5.8 million s/f was leased. Typically the fourth quarter is the busiest period of leasing because tenants often try to close deals before the new year for accounting and financial reasons.
The amount of medium to large sized spaces, which Cushman categorized as any space of 50,000 s/f or larger, shrunk dramatically, from 98 blocks a year ago to 67.
“We have four million s/f less in the choices for tenants 50,000 s/f and up,” said Joseph Harbert, Cushman’s chief operating officer, who led a company presentation to the media Tuesday morning in midtown.
Harbert noted that the tightening of bigger spaces has led tenants to compete amongst each other for openings again, a factor that can drive up rents.
“There is some bumping going on,” Harbert said, hinting at a recent example at 120 Park Avenue, where Bloomberg LP, the media and financial reporting company, recently took a 400,000 s/f lease, pushing aside smaller tenants Wells Fargo and The Hartford, an insurance company, who had both been arranging deals.
Still, overall rents for the quarter didn’t rise by much. Average rents in Manhattan were $54.73 per s/f, up only slightly from $53.34 at the end of 2010, and still 1.2% below where they were a year ago. Class A space in Manhattan rose to $62.47 per s/f from a $61.96 per s/f last quarter.
In midtown, rents rose during the quarter from $62.46 per s/f to $62.63 per s/f. Although rents haven’t risen dramatically, leases have become more lucrative for landlords, who have issued fewer concessions to attract tenants. Cushman estimated that net effective rents, which include the money landlords invest in the form of tenant improvements and periods of free rent, have grown by 24% from the first quarter of 2010.
Some real estate experts have speculated that the current leasing has been driven by large tenants eager to lock into today’s discounted rents and not job increases and economic growth that would drive a sustained recovery. Harbert noted that leasing began to taper off in March.
“I would be worried if this had happened for more than a single month,” Harbert said. “But it’s too early to tell.”