3Q sees increase in vacancies, says CB Richard Ellis report.

According to CB Richard Ellis' Third Quarter Office Market Report, Midtown Manhattan as a whole experienced a slight increase in vacancies as tenant demand continued to cool off and space was returned the market. Consequently, Midtown's vacancy rate closed the quarter at 9%, up from the 8.6% recorded during the second quarter of the year. Nowhere was the rise in availability more visible than Midtown North's Plaza, Grand Central/UN and the Rockefeller Center submarkets where the largest amount of space was vacated.

As a result of the increase in vacancy rates, average asking rents in Manhattan dropped by $1.06 from the end of second quarter to close the third at $41.77 per SF.

Despite the drop in average asking rents and climbing availabilities, Manhattan's office market is certainly not in dire circumstances. One major positive is that the market is not being inundated with the tremendous surplus of space it was faced with during the recession of the early 1990s.

Second, development has remained conservative and the completion of projects has been spread over several years so new space has not been a major factor. Currently there are only five major commercial buildings under construction in Manhattan. Three of those--300 Madison Ave., 60 Columbus Circle and 628-630 West 58th St.--have expected completion dates in 2003, while the 7 Times Square and 73 Lexington Ave. are not expected to hit the market until 2004.

One area of concern, though, continues to be Downtown Manhattan. That market's vacancy rate jumped by more than three percentage points to end the third quarter at 15%. In addition, Downtown's absorption was once again on the negative side of the equation and closed the third quarter at negative 3 million SF, with more than 1.4 million SF of negative net absorption in the South Ferry Financial segment alone.

A close second in terms of negative gains was the Midtown North submarket. Midtown North recorded negative 1.1 million SF of negative net absorption, a 303% decrease from the second quarter of 2002.

With 115,000 SF removed from the overall inventory of space, Midtown South was the only submarket to post positive absorption during the third quarter. Midtown South's Penn Station district led the way with 210,793 SF of positive net absorption.

Manhattan's office market is expected to continue at this pace at least through the first half of 2003 when a number of major leases will be coming up for renewal. In addition, analysts are predicting that the economy should be making strides towards recovery leading the way to a resurgence of job creation and therefore a revitalized office leasing market.