Class B rents go into overdrive as tenants search for cheaper space.

The rush to find an alternative to the pricey rents in Manhattan's trophy towers has resulted in a major spike in rents in Class B buildings, according to the latest report from Jones Lang LaSalle.

The company announced that average rental rates for Class B buildings rose faster in the first quarter of 2007 than rents for Class A product, swelling by 11.7% in midtown compared to the 7.9% recorded for Class A space there.

Rents for midtown's Class B buildings rose to $51.54 psf in the first quarter from $46.13 at the end of 2006. Meanwhile, the area's prime property went from $78.62 at year's end to $84.81.

"Throughout Manhattan, increases in average rental rates for high-end product have begun to moderate as tenants look for spaces in lower quality or less expensive buildings," said James Delmonte, vice president and director of research with Jones Lang LaSalle's New York Office.

"Space users are pushing their space search out into outlying submarkets and secondary buildings and this heavy activity is fuelling rent growth throughout the city."

Rents for Class B buildings in midtown south and Lower Manhattan followed a similar trend, according to the report. Midtown south Class B space rose 5.9% in the first quarter of the year compared to the 3% drop in Class A property. Lower Manhattan Class B spaces posted an 11.4% increase while Class A space rose by 3.9&.

As rents for Class B office space continue to escalate, it will push the surge upwards to Class A, according to Frank Doyle, managing director at Jones Lang, who commented, "Class B rents rising will continue to put upward pressure on Class A rents because, as rents at the bottom progress, it reinforces the Class A market."

Development of The New York Times Building at 620 Eight Avenue, and The Bank of America Tower at One Bryant Park, which combined added 3.7 million square feet of Class A office space to the market, contributed to the rise in midtown vacancy rates to 7.7% from the 6.56% at the end of 2006.

1290 Sixth Avenue, also added 500,000 s/f of sublease space to the market, yet despite all this added space, vacancy rates throughout the city remain low at 7.60%.

Downtown saw vacancy fall after 500,000 s/f was taken off the market at 95 Wall for residential conversion. The Jones Lang report shows Class A vacancy dropped to 7% from 10.41%, and Class B fell to 10.4% from 11.9%.

"I see nothing in sight that suggest that the demand for space will lighten up, because there is pent up demand, limited supply and a huge market," said Doyle.

Delmonte added, "As long as there is no new construction coming onto the market, we will still see rental rates proliferate, and not much supply will come in until 2008."