By Daniel Geiger
The Manhattan office market could be poised for a sharp increase in rents, according to data released yesterday by the real estate services company, Cushman & Wakefield.
“If history is a predictor, we are going up between 83% and 98%,” said Joseph Harbert, C&W’s chief operating officer who presented the company’s statistics at a breakfast hosted by the firm in midtown.
Harbert pointed to past statistics that show rents rose by 98% from 1996 to 2001 in Manhattan before a recession in the early 2000s and the bursting of the dot-com bubble brought rates crashing back down, but not below where rates were before the run up.
During the last period of recovery, starting in 2004 and stretching to 2007, rates rose by 83% before again falling during the recent recession. With the recession officially over and the Manhattan office market strengthening,
Harbert predicted that rents in upcoming years will exceed the last real estate boom when rates reached record heights.
The prediction was based on the strong recovery of leasing activity, rent and occupancy numbers in the city from the recession and from past economic cycles when Manhattan rebounded to much higher rental rates during past periods of economic recovery.
According to the company, 17.6 million s/f of space was leased in Manhattan in the first six months of the year, an amount that would put the market on pace for its highest leasing total in over a decade, C&W said.
The activity drove strong space absorption during the first half of the year, a measure of the amount of net space either added to the market or removed from the pools of available vacancy. C&W stated that nearly 2.7 million s/f of space was taken off the market, the first time that the amount of empty space fell during the first half of the year since 2007, before the recession. Vacancy fell to 9.4% from 11.2% a year ago, a figure just outside of what C&W terms a window of equilibrium where landlords and tenants begin to have commensurate bargaining power during lease negotiations.
Even with the tables turning from a market that favors tenants, rents have begun to rise only modestly. Average asking rents in Manhattan at the end of the second quarter were $55.52 per s/f, a slight 2.2% increase over this time last year.
“There is a little bit of hesitancy among landlords,” said Harbert.
“I think there is negative sentiment, worries about the global debt crisis and job growth,” added Dale Schlather, a top leasing broker at C&W, explaining why landlords have been wary to bring rates up at a faster pace, even as it appears they have the traction to do so.
Other brokers at C&W were more bullish about a turnaround.
“It takes four years to build a new building,” said Josh Kuriloff, an executive at C&W who is one of the firm’s leading dealmakers in the city, explaining that market is heading for an upturn because it is so difficult to add to supply in Manhattan.
“We’ll start to see a significant increase in rents again. The lows are never as low as the past lows and the highs are always higher than the past highs,” said Kuriloff.
In midtown, 11 million s/f of space was leased during the first half of the year, a significant jump over the 8.6 million s/f of deals during the first six months of 2010, with 6.1 million s/f of deals leased in the second quarter alone. Vacancy was 9.8% compared to 11.5% a year ago and rents on average were $63.35 per s/f, 2.7% higher that in June of 2010.
Harbert pointed out that the upper tier of the market has come back stronger. The vacancy rate for Class A space dropped to 10.5% from 12.5% last year and rents rose 4% for this type of space to $68.47 per s/f on average. The Plaza District, one of the priciest submarkets in the district, has recovered faster than the rest of the market. Harbert said that while midtown rents fell an average of 47.6% during the recession, Plaza District space fell 50.5% during the period.
But the area has come back more quickly. So far, midtown rents on average are up 11.4% Harbert said while Plaza District space has risen by 20.4%. “Rents at the high end are rising at about twice the rate as the rest,” Harbert said.
In lower Manhattan, 4.36 million s/f of space was leased during the first half of the year, a 171.8% increase over the amount of space leased during the first six months of 2010. Rents in the area rose on average by 4.2% year over year to $39.38 per s/f on average.
The investment sales market in the city has also begun to improve dramatically after coming to a near standstill during the recession.
Harbert said that about $13.1 billion of sales have been completed in the first two quarters of the year and that another $4.4 billion is in contract to be completed. Last year, $5.2 billion of deals were done during the same period.
“Double it and you’d reach $35 billion of sales this year, which is on par with 2006 and would be the second highest year of buying activity in history,” Harbert said