City real estate primed for growth, Colliers says.

New York City vacancies are at their lowest in five years, and in the past quarter, rentals have increased 6 percent and Class A absorption by more than 21 percent - all indicators pointing to a market primed for growth that will soon be "back to the future", predicts Colliers ABR's The Barometer for the remainder of 1997.

The quarterly Manhattan office space market report sees the forces of increasing rents and decreasing availabilities creating a market that may soon be able to support the financing of new commercial construction, echoing the renaissance of the mid to late '80's.

A number of forces are contributing to decreasing supply. Twenty Class A tenants, including CBS, Bear Stearns, Young & Rubicam and Blue Cross/Blue Shield are competing for large blocks of corporate space in excess of 200,000 square feet. Vacant space, The Barometer predicts, will continue to decrease by 8 percent annually over the next four years.

Development is certainly not out of the picture, however, The Barometer cautions that a developer would need an effective rent, including amortized free rent and tenant improvements, of $50 per square foot to move forward with financing.

Large Corporations Sustain Demand

Throughout the first half of this year and all of 1996, New York's Class A market experienced sustained demand, driven largely by corporations expanding operations.

Overall, the vacancy rate dropped from 15.5 percent in the first quarter of 1996 to 12.03 percent in the beginning of 1997. In Midtown, vacancies dropped from 14.19 percent in early 1996 to 10.47 percent today, and the trend is expected to continue throughout 1997. Leading the growth is the Grand Central sub-market, where vacancies declined from 17.1 percent to 13.75 percent in that same time period.

Downtown, the market has also experienced sustained demand, beginning the second quarter of 1996. Vacancies decreased dramatically during that period from an average of 19.23 percent to 15.25 percent. The Barometer predicts a continuing drop in the rate, reflecting the completion of such large deals as Goldman Sachs taking 520,000 square feet at 10 Hanover Square and Standard & Poors' 960,000 square-foot lease at 55 Water Street.

Rentals May Lag Behind Absorption - But Just for Now

Pricing for rentals - which average $32.86 for Class A space market-wide - has been lagging behind space absorption, reports The Barometer. Class A rentals have not yet fully responded to the market's supply/demand conditions, but are expected to by year's end.

In Midtown, rents increased 4.4 percent from $34.34 per square foot in the first quarter of 1996 to $35.88 in the first quarter of 1997. Leading the increase is the Grand Central sub-market, which outpaced Midtown with a 7.47 percent increase. Rentals went from $32.01 per square foot to $34.40 per square foot in the same time period.

During that time, Downtown rentals increased an average of 9.73 percent from $26.01 per square foot to $28.54 and led all the New York City sub-markets, further attesting to the rebirth of Lower Manhattan.

New Construction on the Horizon

With no construction in three years and none in the planning stages now, with the exception of 1.5 million square feet at 4 Times Square coming on line in 1999, it's expected demand will continue to mount, predicts The Barometer. Tenants will be forced to consider other tri-slate locations, including Fairfield and Westchester counties and New Jersey, particularly if New York City proves to be either too expensive or space opportunities are not available, Colliers predicts.

New York real estate is benefitting from factors including:

* The growth of the national economy and in consumer spending, combined with low inflation;

* Growth in the New York City economy, where private sector employment increased by 51,300 jobs since the beginning of 1996;

* Continued investment in U.S. real estate in general, which is in the midst of solid growth;

As to the future, The Barometer predicts upward pressure on rentals and even greater pressure to finalize negotiations quickly. Options will diminish, security deposits grow larger as space tightens, and Downtown will continue to rebound. As the market swings to the landlord side, owners will be able to be more selective and opt for higher-rated tenants. Determining the magnitude of this trend will be the availability of development sites in New York, and the response of its "competitive, substitute" markets in Westchester, Fairfield and New Jersey, as well as such factors as the overall national and regional economy.