Commercial rents rise as vacancy drops.

Trammell Crow Company released third quarter statistics indicating that, while still being affected by the lingering repercussions of a poor economy, Manhattan's commercial real estate market is showing signs that it has reached a plateau.

For the period ending September 30, overall availability has dropped .2 percent to 14% and approximately 5.2 million square feet of space more has been leased than in the same period last year.

Drew O'Malley, principal and director of Brokerage Services of Trammell Crow Company's New York office, cited one primary reason for the market's stabilization. "Big deals have helped revive the market," Mr. O'Malley said. "Through the third quarter, 32 leases of more than 100,000 square feet have been completed in Manhattan, nearly double the amount of similar-sized leases we saw through third quarter 2002."

Mr. O'Malley also states that for the first time since the attacks, the real estate industry is seeing legitimate tenants, who are serious about making decisions, in the market looking for space. "While there is definitely more available space than there are tenants ready to lease it, brokers, especially those representing landlords, are seeing glimmers of activity that could suggest the beginning of the reduction of space and firming of rents. Companies are particularly targeting sublease space and are taking advantage of rent disparities."

According to the report, seven leasing transactions completed during the third quarter over 50,000 square feet had the most impact on availability rates throughout Manhattan--a 310,000 square-foot renewal at 767 Fifth Avenue by The Estee Lauder Companies, Inc, a 104,100 square-foot renewal and expansion by Soros Fund Management at 888 Seventh Avenue, Clarendon National Insurance Corporation's 81,000 square-foot direct deal at 7 Times Square, DoubleClick's lease at 111 Eighth Avenue for 76,000 square feet of office space., State Street Corporation's lease at 2 World Financial Center for 83,810 square feet of office space, and a sublease of 108,120 square feet at 1 State Street Plaza by Gulf Insurance Group.

Activity in the Midtown market helped it to record positive absorption of 432,950 square feet for the first time since December of 2001, while steady rental rates of $46.43 per square foot for the third consecutive quarter led to a .6 percent drop in overall availability to 13.4%--a trend not seen since September of 2000.

Despite a strong second quarter that featured two of the year's largest deals at 55 Water Street and 2 World Financial Center, the Downtown office market saw leasing activity drop nearly one million square feet to 724,421 square feet.

However, year-to-date leasing activity in this market rose to 3.7 million square feet compared to 3.5 million square feet of activity a year ago. The negative net absorption of 366,097 square feet recorded this quarter was caused by two large blocks that officially becoming available in July--a 530,000 square foot block at 15 Broad Street, where Bank of New York had begun leasing the entire building, and Lehman Brothers' offering of 372,000 square feet of space for sublease at 1 World Financial Center. Needless to say, Downtown's overall availability jumped slightly from 15.5 percent last quarter to 16.1 percent, however steady rents of $33.68 overall--a $12.75 per square feet savings from rental rates in the Midtown office market--will continue to attract tenants through the end of the year.

The best place to find a deal is still the Midtown South market--the smallest of the three Manhattan office markets with nearly 49 million square feet of office space. Weighted average asking rents remained relatively flat for the fourth consecutive quarter at $30.59 per square foot, the lowest among the three markets. However, asking rents in the Class A sector grew $.80 to $35.84 per square foot. Approximately 540,870 square feet of space was leased off the market, pushing year-to-date absorption into positive territory since 2002.

Chelsea--Midtown South's second largest district--demonstrated the biggest gains for the third quarter. Average asking rents of $31.29 per square foot have kept leasing activity on the rise. Quarter over quarter, leasing activity grew threefold from 90,276 square feet to 350,000 square feet, accounting for 59.1% of the entire amount leased in Midtown South and allowing the Chelsea market to record positive absorption of 393,373 square feet--a near 200% increase over the -329,480 square feet recorded in the second quarter.