City's commercial market defying all expectations.

Cushman & Wakefield released third quarter statistics for the New York City commercial real estate market that indicate new leasing in the city has increased by more than six million square feet compared to the same period a year ago.

The strong leasing activity resulted in a decline in the overall office vacancy rate in Manhattan to 11.4 percent, its lowest quarterly rate in more than two years. For the nine-months ending Sept. 30, 2004, new leasing activity measured 20.9 million square feet, compared to 14.9 million square feet through the first nine months of 2003.

The vacancy rate for Downtown Manhattan, which was impacted the most following the attacks on the World Trade Center, declined to 12.7 percent--its lowest point in more than a year--from its five-year high of 13.5 percent at year-end 2003.

Ken Krasnow, executive managing director at real estate brokerage and services firm Cushman & Wakefield, said that the health of the market "defies expectations."

"It's truly remarkable, considering where we've been in the not-too-distant past," Krasnow said. He pointed to the decade high vacancy rate Downtown of 20.7 percent, reached in the first quarter of 1996, as an indicator of what could have happened to the market for office space following the destruction of the World Trade Center. Krasnow cited several factors that have buoyed the Downtown market over the past three years; he said there's been a significant reduction in sublease space, which at 2.5 percent has matched its three-year low from its high of 5.9 percent in mid-2002; major companies and organizations have made big commitments and recommitments to large offices leases Downtown; older office buildings have been converted to residential units, and the economy has continued to improve.

The overall absorption rate, which measures the change in square footage occupied over a given period of time, is positive 2.3 million square feet year-to-date, indicating more space has been leased in Manhattan than has been added to the market vacant. At this time last year, the absorption rate in Manhattan measured negative 5.4 million square feet.

Midtown Manhattan, which experienced a decline in vacancy to 11.0 percent from 11.9 percent a year ago, has seen a substantial rise in average asking rental rates. At the end of the third quarter, rents in Midtown reached $47.04 per square foot, up from $45.63 a year ago.

For the six-month and 12-month periods ending Sept. 30, 2004, all three Manhattan markets experienced significant vacancy rate declines. Midtown South's vacancy decline was most significant, falling to 11.2 percent from 13.7 percent one year ago.

Krasnow said trends in leasing activity by industry bode well for the Downtown market and Manhattan in general going forward into 2005.

"Financial services firms are back in a big way, eclipsing law firms as the most active industry in the market this year," he said.

Financial services firms have leased more than 2.6-million-square-feet year-to-date, while law firms have leased 2.2-million square feet. "Looking ahead," Mr. Krasnow said, "the outlook for leasing activity by industry is dominated by financial services."

According to estimates of tenants in the market and their anticipated square footage requirements, the most active industries in the months ahead look to be financial services, at 6.8 million square feet, law firms, at three million square feet, and educational institutions at 1.2 million square feet. The total value of transactions in the investment sales market, at $10.3 billion year-to-date, has surpassed me total value of transactions in all of 2003, indicating that 2004 will be a record year in New York.

According to Krasnow, a highly favorable interest rate environment continues to be an important factor, combined with a higher tolerance among investors for risk. "At this time last year, properties on the market achieving premium sales prices had predictable characteristics," Mr. Krasnow said. "Most were high quality buildings, fully occupied, with long-term leases in place.

"Today," Krasnow added, "while demand still outpaces available product on the market, investors are confident in an environment of improved economic and leasing fundamentals, so the universe of potential investments has broadened."

Historically, Downtown and Midtown South have followed leasing trends in Midtown. Midtown is clearly firming up, and the outlook is positive. New construction there has been substantially pre-leased to anchor tenants, with little speculative development underway. In addition, new construction has remained attractive to tenants for its larger, more efficient floor plans and high-end infrastructure.

In combination with an improved economic outlook and jobs picture, this bodes well for new projects delivered this year and projects scheduled for completion in the near future.

Downtown's improvements will be challenged by additional large blocks of space expected to be marketed by companies there, as well the delivery of new construction, beginning with 7 World Trade Center.

Despite this, Downtown is expected to continue to improve, based largely on record rent differentials between Midtown and Downtown.

OFFICE MARKET STATISTICS BREAKDOWN

MANHATTAN        3Q '04    2Q '04    1Q '04    3Q '03

Total Vacancy     11.4%     11.8%     12.2%     12.5%
Sublease Vac.      2.6%      2.8%      3.1%      3.7%
Overall Rent     $40.51    $40.56    $40.06    $40.39

DOWNTOWN         3Q '04    2Q '04    1Q '04    3Q '03

Total Vacancy     12.7%     13.0%     12.9%     13.0%
Sublease Vac.      2.5%      2.6%      2.5%      3.3%
Overall Rent     $32.16    $32.25    $33.68    $35.60

MT SOUTH         3Q '04    2Q '04    1Q '04    3Q '03

Total Vacancy     11.2%     11.9%     13.0%     13.7%
Sublease Vac.      1.6%      2.1%      2.4%      4.0%
Overall Rent     $30.66    $30.56    $31.04    $30.75

MIDTOWN          3Q '04    2Q '04    1Q '04    3Q '03

Total Vacancy     11.0%     11.3%     11.8%     11.9%
Sublease Vac.      3.0%      3.1%      3.6%      3.8%
Overall Rent     $47.04    $47.16    $45.61    $45.63