By Daniel Geiger
The Manhattan office market is on pace to have its strongest year of leasing activity in the last decade, according to data released by the real estate services firm CB Richard Ellis.
The company’s data showed that about 15.7 million s/f of space was leased through the first two quarters of the year. The figure would appear to put the market on track for over 30 million s/f of deals in 2011, even more than 2006, the previous peak of activity over the last ten years when the economy was booming and 29.9 million s/f of Manhattan space was leased.
The projected activity would remove about 7.4 million s/f of space from the market this year, assuming that the pace of 3.7 million s/f absorbed through the first six months of the year continues during the second half of the year.
Absorption is a key indication of the market’s health because it measures how much net space is either or added or subtracted from the city’s pool of vacant space. This year’s projected number would also be a ten year highpoint, besting the 7.3 million s/f of net absorption that took place during 2004 when the Manhattan office market was last bouncing back from a recessionary period.
About 23.6 million s/f of vacancy was added to the market during the recession as companies across the city began shedding offices and few tenants committed to new leases or took space to expand. Matthew Van Buren, CBRE’s director of midtown leasing and the company’s interim tri-state CEO, said that most of the millions of s/f of sublease space from the downturn has since been taken by tenants or since withdrawn from the market. In total, according to CBRE data, about 9 million s/f of space has been absorbed so far in 2010 and 2011.
The strong leasing this year has continued to drive rental and occupancy rates, which began to increase last year as the market emerged from the doldrums. Average asking rents in Manhattan were $51.93 per s/f by the end of June, having made a steady month by month rise from the $47.61 per s/f average at this point a year ago. The vacancy rate was 7.8% versus 9.3% a year ago. Availability, a figure that CBRE says is a more telling statistic that takes into account everything that is either empty now or will be over the next year, fell from 14% a year ago to 11.3% in June.
Despite, the solid numbers so far, CBRE executives, who presented the company’s data on Monday at a breakfast in Lower Manhattan, warned of the uncertainty going forward. There have been a number of troubling economic indicators that could dampen leasing activity in the city, such as the prospect of higher taxes, the weak job growth, and government debt both here and abroad.
“What really has to happen now is there has to be new job creation,” Van Buren said. “We need job creation and it needs to come from the financial services sector. We’re still at 11.3 availability, still 2-3 points above the 9% magic number, so we have work to do.”
CBRE executives touted the comeback of the market in lower Manhattan, a neighborhood that was hard hit by the downturn.
“This is not your grandfather’s downtown. It’s not even your father’s downtown,” said Shelly Cohen, the head of CBRE’s lower Manhattan office, referring to the construction of millions of s/f of new office space at the World Trade Center site, the recent lease by the media giant Conde Nast at 1 World Trade Center, and the neighborhood’s burgeoning residential population among other signs of progress.
Availability downtown dropped from 12.8% last year to 11.3% in June, lower than the 11.7% rate in midtown, a market that traditionally leads downtown in most measures of market strength. Rents of course in midtown were significantly higher, $60.75 per s/f on average compared to $39.11 per s/f for rents downtown. Rents in midtown have also rebounded more dramatically, rising from a $54.83 per s/f average last year. Downtown rents were only slightly lower a year ago, $38.26 per s/f on average.
CBRE executives Brad Gerla and Peter Turchin, who handle leasing for 3 and 4 World Trade Center, said that newly constructed office buildings with state of the art design and infrastructure would draw office users to lower Manhattan at rents just as high or higher than in midtown.
“All of the buildings will have gold or above LEED certification on the site, which is becoming important in recruiting people,” Turchin said. “The young workforce wants to be green and wants sustainable design.”
Van Buren said that in order to attract talent, companies were focusing on the quality of product in the market, not the location.
“There’s a different dynamic and it’s the appetite for new construction,” Van Buren said, noting that the quality of the new buildings at the WTC site would draw tenants who had previously been wary to locate in lower Manhattan, which is perceived as less convenient for commuters. “In this city within a city, you won’t need for there to be a big difference in the pricing between downtown and midtown that has traditionally been there, to draw takers.”