Corporations keep office market red hot.

Jones Lang LaSalle's quarterly market report reveals that the Midtown office market continues to post the best performance of any of New York's office submarkets in the final quarter of 2004.

Heavy interest from space users helped the overall vacancy rate in Midtown to plummet 12.7 percent in the past year, dropping to 8.9 percent at year-end 2004 from 10.2 percent at year-end 2003. Midtown Class A space posted a 11.4 percent drop, falling to 8.5 percent at year-end 2004 from 9.6 percent at year-end 2003.

Midtown rents overall rose 3.5 percent, increasing to $48.82 per square foot at year-end 2004 from $47.11 per square foot at year-end 2003. Class A rents in Midtown jumped 8.7 percent, increasing to $56.75 per square foot at year-end 2004 from $51.79 per square foot one year earlier.

"Manhattan corporations continue to heat up the office market," said Barbara Byrne Denham, research director for Jones Lang Lasalle's New York office. "Unlike the previous real estate cycle, New York firms are taking space to accommodate a real need for space, not in anticipation of future growth."

Employment in the financial services sector is increasing, which will contribute to additional tightening in the office market. If the trend continues, the overall vacancy rate in Midtown could wind up close to 7 percent by the end of 2005, prompting a rapid spike in rental rates.

Virtually the entire Manhattan office market ended 2004 on a positive note, with decreases in vacancy rates in all submarkets. Overall, New York saw its office vacancy rate drop nearly 10.4 percent, falling to 9.5 percent at year-end 2004 from 10.6 percent at year-end 2003. The city's Class A vacancy rate fell 9 percent, dropping to 9.1 percent at year-end 2004 from 10.0 percent one year earlier.

With tenants active throughout the city, New York's office market recorded nearly 7.4 million square feet of net absorption in 2004. That is a remarkable 493 percent increase over the 1.5 million square feet of net absorption the city posted in 2003. As a comparison, New York saw negative net absorption of 1.5 million square feet in 2002.

With so much activity this year, it's not surprising that Manhattan rental rates increased. Overall, rental rates in New York rose nearly 1.4 percent, increasing to $41.33 per square foot at year-end 2004 from $40.77 per square foot at year-end 2003. Class A rents climbed 5.5 percent, rising to $47.55 per square foot at year-end 2004 from $44.94 per square foot one year earlier.

Downtown experienced a drop in vacancy rates in all building classes in 2004, despite the addition of a large amount of space through new additions and large space givebacks. Overall, the Downtown vacancy rate fell just one percentage point, dropping to 11.8 percent at year-end 2004 from 11.9 percent at year-end 2003. Class A space posted better numbers, with the vacancy rate falling 5.4 percent, decreasing to 10.6 percent at year-end 2004 from 11.2 percent at year-end 2003.

Although Lower Manhattan has struggled with the addition of large amounts of office space, rental rates have remained remarkably steady. Downtown rental rates overall fell 2.4 percent, dropping to $31.19 per square foot at year-end 2004 from $31.95 per square foot at year-end 2003. Class A rents barely moved, falling just $0.09 per square foot to $33.01 per square foot at year-end 2004 from $33.10 per square foot one year earlier.