C&W: office leasing in lower Manhattan up 68%.

Cushman & Wakefield released its midyear report for the Manhattan commercial real estate market showing a surge in demand for office space in Downtown Manhattan.

At the end of June, Downtown Manhattan's vacancy rate declined to 6.7%, an unprecedented drop from 11.2% at this time last year.

Commercial real estate experts attributed the decline to a 68 percent increase in leasing activity Downtown in the first six months of 2007, for a total of 2.2 million square feet.

"This is the one of the largest declines in vacancy we've recorded in recent history," said Joseph Harbert, Cushman & Wake field's chief operating officer of the New York Metro Region. "For a market recording a double-digit vacancy just 12 months ago to now be resting under equilibrium is quite remarkable."

Harbert, who said equilibrium is typically 7-9% vacancy, attributed the noteworthy decrease in availability in part to record rents in Midtown and a lack of space in Midtown and Midtown South.

"Some tenants are being priced out of Midtown, and are unable to find adequate space in Midtown South," said Harbert. "But we're also seeing tenants from a diverse range of industries that genuinely want to operate Downtown. They're aware of the positive momentum, and they're looking forward to becoming part of the revitalized community there."

Robust leasing activity and a decrease in availability put upward pressure on asking rents, most notably in premier properties. Class-A asking rents Downtown jumped $15 to more than $50 per square foot at midyear 2007, up from $35 at midyear 2006, and surpassing Class-A asking rents in Midtown South.

Rents continued to increase significantly across all of Manhattan. Overall asking rents rose more than 36 percent from this time last year, ending mid-year at $59.17. Overall Midtown rents increased more than 37 percent, despite a noticeable slowdown in leasing activity in the Midtown market.

"Midtown leasing activity is off nearly 20 percent from this time last year," said Mr. Harbert. "We're seeing some price resistance, but it has also become difficult to find space as the market has tightened."

A lag in leasing activity kept Midtown's overall vacancy rate steady at 5.3 percent, down 1.6 percentage points from midyear 2006, but unchanged from the first quarter of 2007. One area of Midtown that recorded an increase in activity was Park Avenue, which saw an increase of 50 percent at midyear 2007. Average asking rents on Park also surpassed $100 per square foot for the first time in history.

Park Avenue and the Madison/Fifth Avenue submarkets were home to an increased number of high-end leases during the first half of 2007. At midyear 2007, there were 18 leases with taking rents in excess of $125 per square foot, compared to 16 in all of 2006.

According to Harbert, these rental rate increases may continue.

"A continued shortage of supply with little near-term significant new construction could push rents up substantially, with some of our projections anticipating average class-A Midtown rents above $100 per square foot by 2010," he said.

At the end of the second quarter, average class-A Midtown asking rents were $75.79, a 35% increase from this time last year.

Financial services firms led the charge for high-end rental rates, accounting for more than 75 percent of leases signed above $125 per square foot. These same firms were also the most active in taking space, making up 36.4 percent of leasing activity in the first half of 2007. Moreover, at midyear 2007, nearly two-thirds of tenants currently in the market for office space were financial services firm.

"A strong economy, steady job growth and increased M&A activity continue to make financial services firms the most active in Manhattan," said Mr. Harbert. "One out of every three square feet of office space in Manhattan is currently being sought by financial tenants."

The Manhattan investment sales market finished the first half of 2007 with $34.1 billion in sales closed and under contract, up more than 83 percent from the $18.5 billion closed and under contract at midyear 2006.

"We ended 2006 with a record-breaking $34.7 billion in sales closed," said Harbert. "It's safe to say we're on pace to easily break that record."

Investors were increasingly focused on class-A office product during the first half of 2007, with premier properties accounting for 62.2 percent of all sales closed and under contract, compared to 39.3 percent at this time last year.

According to Harbert, it's no longer just the Midtown trophy properties that are being eyed. Capital committed to Downtown office buildings increased significantly, reaching more than $2.3 billion at midyear 2007, up from just $647 million at this time last year.

Increased interest rates and tightening lending standards have caused some speculation about a slowdown in the investment market, Harbert noted. However, "with class-A rents exceeding $100 per square foot in many buildings, extremely low vacancy rates, limited new construction, and an abundance of investment capital targeting New York, we do not anticipate any significant impact this year," Harbert said.

Manhattan retail rents continued their upward climb during the first half of 2007. According to Harbert, there is a constant and steady demand from a wide variety of retailers. Continued strong demand for a limited amount of space has pushed rents to new highs.

Madison Avenue rents experienced the largest increase, passing the $1,000 per square foot mark. At midyear 2007, average asking rents on the famous corridor reached $1,019, up $134 from this time last year.

Fifth Avenue held strong as the most expensive retail street in the world, with asking rents above 49th Street at $1,500 per square foot. At midyear 2007, there were no direct availabilities on the Street. According to Harbert, last year's Gucci lease at Trump Tower solidified Fifth Avenue as the destination for world-class brands and continued interest from retailers validates current asking rents.