Bouyant market triggers rise in Manhattan rental rates.

National and international retailers continued to extend their presence in the Manhattan market in the first quarter of 2006.

New players and the expansion of existing brands lowered vacancies and triggered a rise in asking rental rates in the majority of the Manhattan retail submarkets, including Madison, Fifth Avenue, Soho and Lower Manhattan.

Major advances were made in Lower Manhattan during the first half of the year, as activity accelerated within and around the Financial District, as new brands entered the market.

Positive news on the development front at the World Trade Center site, strong leasing activity at the newly constructed 7 World Trade Center and the start of construction at Goldman Sachs new headquarters building were all contributing factors to a brighter retailing picture for Lower Manhattan.

Once considered solely a financial center, the pieces are in place for Lower Manhattan to become a 24/7, work, live and play neighborhood.

The emergence of luxury retail, coupled with expected population growth to nearly 50,000 affluent Lower Manhattan residents by the end of the decade, has fired up interest.

Landlords have been standing by for the past five years, and the long wait may now be over as the pace of leasing and rental value increases are now in sight.

A variety of retailers offering an expanded menu of product and services are expected to enter the area in order to cater to the impending influx of residents, tourists and office workers.

Vacancy on Fifth Avenue below 49th Street dropped three percent from last quarter to 10.6% at midyear, as notable retailers, including H&M and Ann Taylor, entered the market.

H&M leased 24,500 s/f of retail space at 505 Fifth Ave., the brand new office tower located on the corner of 42nd Street and Fifth Avenue, while Ann Taylor took 10,000 s/f at 600 Fifth Ave.

In other Fifth Avenue news, the upper corridor of the Avenue saw a notable increase in available space compared to last year. There are at least six large-format stores available for lease from East 48th Street to East 58th Street, including 600 Fifth Ave., 603 Fifth Ave., 665 Fifth Ave., 717 Fifth Ave. and 723 Fifth Ave. However, there are no available units on Fifth Avenue less than 2,500 s/f..

Moving downtown, Soho continued to experience low vacancy and record absorption levels. Despite the addition of at least five newly constructed retail units, Soho's vacancy dropped to 7.8% at midyear, down from 9.2% at the first quarter.

Strong demand led to increased rental rates, with landlords asking an average of $215 per square foot for ground floor space, up from $204 at the first quarter.

Several significant transactions contributed to the decline in vacancy, as new companies entered the market.

Spring Street has become one of the tightest blocks in Soho. Von Dutch and the trendy footwear retailer, Crocs, grabbed two of the few remaining spaces there during the second quarter, adding to the balance of trendy, luxury and mainstream retailers found on the block.

The increased activity on Spring Street also caused a rental hike on the street, with average ground floor rents up $62 per square foot from the first quarter.

Madison Avenue, from the southside of 57th Street to the Southside of 72nd Street, also saw a significant drop in availability. Luxury retailers Issey Miyake and Dolce & Gabbana reconfirmed their commitment to Madison Avenue in the second quarter of 2006. Issey Miyake relocated its previous 992 Madison Ave. boutique 10 blocks south to 804 Madison Ave., and Dolce & Gabbana announced it will take over the neighboring space at its three-level store on the corner of 69th Street and Madison Avenue.

Of the few available retail units on Madison Avenue there are few that are less than 1,500 s/f, which led to a spike in rental rates for smaller-format stores in the second quarter.

Average asking ground rents increased $10 per square foot to $885 per square foot at midyear. However, we've seen instances in which tenants have paid more than $1,000 per square foot to secure prime locations on Madison Avenue.

The activity on the Upper Westside was similar, as vacancy in the area declined to 4.6%, down from 6.5% at the first quarter, and asking rents jumped to $286 per square foot for ground floor units. However, new developments, notably 2075 Broad way, 1889 Broadway and 1880 Broadway, still offer great opportunities for big-box tenants seeking a new or expanded Manhattan retail presence.

Smaller spaces on the Upper Westside were leased during the first half of the year, as BCBG Max Azria and shoe retailer, Harry Shoes, took space for new locations on Broadway, and Bebe committed to the former Joseph Abboud space at Time Warner Center.

With limited availabilities for retailers and an ever-expanding consumer base, we expect to see continued strength from the retail market throughout the remainder of the year.

BY GENE SPIEGELMAN, EXECUTIVE DIRECTOR, CUSHMAN & WAKEFIELD RETAIL SERVICES GROUP.