Brokers see more tightening before construction boom.

The Manhattan office market should continue to experience rising rents and a decrease in availability in 1998, according to a year-end report issued by Grubb & Ellis New York.

According to the real estate study, there was an absorption of more than 6.45 million square feet of office space in Manhattan in 1997, and average asking rents rose above $29 a square foot, fueling a debate in some quarters as to whether speculative office construction was needed to meet the growing demand.

But before any major speculative office building construction starts in Manhattan, Ray O'Keefe, president of Grubb & Ellis New York, expects rents to rise further, while landlord concessions to new tenants will shrink correspondingly.

"Prices will continue to respond to pressures for Class A and B space throughout the city," said O'Keefe, "but for the most part, developers rather than tenants should steal the New York spotlight in 1998."

He noted, for example, that a developer is expected to soon be designated for the Coliseum property at Columbus Circle. This important redevelopment project will serve as the northern anchor for the revitalization of Eighth Avenue down to Times Square, and complete the Midtown renaissance.

Office development is also expected along the Eighth Avenue corridor from 42nd Street north to 50th Street, and residential development up to 59th Street.

Other 1997 market highlights include the following:

* Fifth/Madison District: Demonstrated an absorption of more than 900,000 square feet, augmented by the CS First Boston lease of more than 100,000 additional square feet;

* Grand Central District: Experienced the greatest absorption rate (almost a million square feet), a drop of 13 percent in availability and average asking rents jumping to more than $33 per square foot;

* Park Avenue District: Availability dropped significantly, with major tenants renewing and expanding space in this most prestigious area;

* Penn Plaza: Availability declined to 15 percent and rents solidified at more than $26 per square foot. McGraw-Hill and Information Builders committed to major leases in the district;

* Avenue of the Americas: Prospective tenants were faced with rents of almost $37 per square foot in this area and availability dropped to 9 percent. The world famous auction house Christies announced a relocation to 20 Rockefeller Plaza in this area.

According to the Grubb & Ellis report, as demand in New York City grows, local government will be less and less inclined to match incentives offered by Connecticut and New Jersey. The result may be some level of corporate relocation to the sub-markets of Westchester and Fairfield counties and New Jersey, even if just for support operations.

But while government incentives to companies dwindle, Grubb & Ellis expects to see greater federal, state and local investment in the region's infrastructure, which will further enhance Manhattan's desirability as a business center. Renovations to Grand Central Station are nearing completion and major enhancements are being planned or are underway for the region's network of airports, bridges and tunnels.

More than 55,000 new jobs were added to the regional workforce during the past year, a growth rate of 0.9 percent, which lagged behind the national average of 3.6 percent. Unemployment rose to 9.6 percent, largely due to staff reductions in government and manufacturing. The service-related industries of health, engineering, accounting and management services accounted for more than 95 percent of the new jobs in the region.