Corporate streamlining continues to impact office market.

"The New York City marketplace continues to benefit from the healthy momentum of leasing activity experienced in the latter half of 1993," noted Maurice Solomon, vice chairman and manager of the Midtown New York office of Julien J. Studley, Inc. During the first two months of 1994, leasing activity totaled 3,775,269 square feet, representing a 5.3 percent increase over the activity of January/February 1993. This activity served to lower Manhattan's available space to 62,196,974 square feet, an 8.6 percent decrease from 1993's January/February total. The Manhattan vacancy rate currently rests at 15.8 percent.

Mayor Rudolph Giuliani's pro-business agenda is likely to boost optimism, with proposed tax cuts, including a commercial rent tax break. "Despite this good news, corporate America's quest to streamline operations continues to hamper a full-blown economic recovery, and will ultimately impact real estate commitments by a number of local corporations," noted Solomon. The region's long-distance telephone industry is the latest business to announce cut-backs, including AT&T, NYNEX and GTE Corporation, to name a few. Additionally, a number of publishing companies, including Paramount Publishing and Harcourt Brace, are re-evaluating their internal divisions.

The Midtown marketplace continues to experience relatively steady leasing activity. During January/February, a total of 3,105,963 square feet of space was leased, representing a 5.7 percent decrease from 1993's activity during the same reporting period and a 2.8 percent decrease in activity from November/December 1993. "This slowdown can be attributed in part to the overall lack of quality product available for lease," said Ira Schuman, senior vice president and co-manager of the Studley Midtown office. Currently, Midtown has 42,184,501 square feet of available space, and a vacancy rate of 14.8 percent.

The Midtown marketplace experienced its own "earthquake" in January, with the collapse of Shea & Gould. This sudden break-up of one of Manhattan's most prestigious law firms sent shock waves throughout the city's law and real estate communities.

"Repercussions of this Fall will emerge during the year ahead, with the expectation that many landlords are now in a position to place increased demands on future lease negotiations, specifically with law firm tenants," said Schuman.

With nearly 75 percent of Rockefeller Center leases due this September a number of Rock Center tenants have started a "chess game" strategy of relocating within the Center to capitalize on expansion opportunities in the diminishing blocks of quality space. For instance, during this reporting period, Lazard Freres & Co. expanded from One Rockefeller Plaza into 210,506 square feet of space at 30 Rock Plaza;; Societe Generale expanded into 312,883 square feet of space at 1221 Avenue of the Americas from 50 Rock Plaza and Banque Indosuez left 10 Rock to lease 90,000 square feet of space at 1211 Avenue of the Americas. This activity is expected to continue over the next six months.

As the market continues to gain momentum, many owners of the limited supply of available Class A product, which currently totals 9,031,727 square feet, are taking a more aggressive stance at the negotiating table.

"Already, the number of early lease renewals and restructuring has declined," said Schuman. Tenants negotiating for premier product will face increases ranging from 5 to 10 percent in deal structures over the course of the year. However, businesses which are primed for growth, i.e., financial service firms and banking institutions, have demonstrated a commitment to the marketplace by expanding operations, while a number of tenants are willing to spend a little more in an effort to capitalize on the closing window of opportunity for prime blocks of space. Currently, the average asking rental rate for Class A space in Midtown totals $39.85 per square foot.

The supply of Class B product in Midtown currently totals 17,045,350 square feet. This significant reserve of space will preclude any noticeable increases in rental rates throughout the year. Currently, the average asking rental rate for Class B space is $28.16 per square foot, with the Plaza I and Westside I submarkets offering the highest asking rates at $30.94 per square foot and $30.83 per square foot, respectively. Smart owners of Class B properties are investing in renovations, such as lobby improvements, and are negotiating favorable lease terms in an effort to lure tenants from a dwindling supply of Class A space.

"The sales momentum initiated in 1993 has continued into 1994 at an accelerated pace," said Mark Teitelbaum, managing director with Studley. During January/February, several significant purchases occurred, including a 350,000 square-foot commercial space at 10 Union Square by Beth Israel Medical Center; a 124,000 square-foot building at 4 Columbus Circle by Steelcase Inc. in a user purchase transaction; and a 507,185 square-foot building at 150 East 58th Street by Equitable. These transactions account for an aggregate value of more than $143 million, representing a significant level of activity during a relatively short period of time.

Interestingly, the uptick in sales activity is driven by a combination of both user purchasers and pure investors.

Many of these investors are newcomers who did not participate in the 1980s roller coaster ride, and are from outside industries such as manufacturing, or old, established companies rich with cash. Several of these investors have focused their attention on lower Manhattan, where many institutions, particularly insurance companies, are liquidating their properties and selling at steep discounts ranging from $20-$40 per square foot.

"This flight to lower Manhattan's traditionally older properties may be attributed to the market's slow recovery as well as the insurance industry's recently announced new regulations on risk-based capital," noted Teitelbaum.

Looking ahead, the pace of investment activity is expected to continue, as more investors as well as user purchasers step up their interest in the marketplace, while favorable economics persist. This activity will be amplified as more product becomes available from institutions and the private sector. "However, a robust recovery is not likely to occur until a significant level of conventional debt financing is reestablished in the marketplace," said Teitelbaum.

"The Downtown New York commercial office market started the year on a strong note, with 669,306 square feet leased during the January/February reporting period," said George Martin, executive vice president and manager of Studley's Downtown Manhattan office. This represents a substantial increase over the 287,205 square feet leased during the same two month period in 1993. The bulk of the activity took place in Class A buildings, with 335,762 leased. Class B and "Other" space were fairly evenly split, with 172,105 square feet and 161,439 square feet leased, respectively.

Building owners report an increase in the number of tenants actively reviewing the market. "In fact, a large number of securities brokerage firms are gain thinking of significant expansion plans after a few years of consolidating their operations," said Martin. It is expected that the "flight to quality" will continue, as owners of Class A space continue to cater to credit-worthy tenants, offering significant upfront concessions. In response, owners of older properties will look to aesthetic improvements to buildings lobbies and common corridors to attract new tenants. But, it is expected that a number of these secondary properties will fall into the wave of foreclosures, which began in earnest in 1993.