Lower vacancies, higher rental rates reported.

According to Newmark & Company's Third Quarter 1998 Manhattan Office Market Report, availability rates in all three submarkets decreased, bringing Manhattan's overall vacancy rate to 8.3 percent. Conversely, weighted average asking rents continued to soar throughout Manhattan, rising 6.3 percent to $35.30 per square foot (psf).

Fueling this increase was Midtown South, where rents reached $27.01 psf, up 24.7 percent from a year ago. Midtown and Downtown rents averaged $44.66 and $30.96 psf, respectively, both up 20 percent year-over-year.

Leasing activity was strong, with a total of 10.3 million square feet leased. For the second quarter in a row, tenants in financial services and government accounted for the most leasing volume.

In the investment market, 10 buildings of 200,000 square feet and more sold for an average price of $182.45 psf. Among these large sales was Equity Office Properties' acquisition of 825 Eighth Avenue for $578 million ($352.44 psf). Most sales, however, were completed before the stock market correction, which has put a damper on the investment market and evoked memories of the late 1980's.

According to Deborah van der Heyden, managing director in Newmark's Corporate Advisory Services Group, "It is healthy to be reminded that today's market will not go on forever. We have to recognize, though, that we are in better shape now than we were in the late 1980's. There has been limited new construction - not enough to disrupt the supply-demand equilibrium that will help the market weather this storm."

Midtown South

The Midtown South submarket continued to experience declining availabilities and climbing rental rates. Rents are up in all nine districts, and the submarket's rental rate hit $27.01 psf, 24.7 percent higher than the $21.66 psf posted one year ago.

The submarket-wide availability rate fell to 7.3 percent from 7.8 percent, mostly due to activity in Flatiron/Union square, Park Avenue South and Chelsea. NoHo/SoHo surpassed Lower Sixth Avenue as Manhattan's tightest district by posting a 0.9 percent availability rate, which translates into a scant 44,845 square feet of available space. Rents in the district rose to $22.78 psf, up 16.9 percent from a year ago.

While the area's office space is in high demand, its retail space is even more precious. Merchants signing retail deals during the third quarter included Daffy's, Yves St. Laurent, Sephora and Casio. Laura Pomerantz, also a Senior Managing Director at Newmark, said "SoHo's boundaries have expanded, pushing south to include Broome and Grand Streets and west and east off of Broadway. Our luxury retail clients, who once only considered Madison Avenue and East 57th Street acceptable, now seriously consider SoHo when choosing a location. The key to the area is its critical density of high profile fashion designers, coupled with its tourist draw."

This scramble by both prestigious and mainstream retailers in NoHo/SoHo has resulted in the egress of the very tenants that forged the area's chic identity. A number of galleries, non-profits, boutique high-tech companies, advertising agencies, "off-center" clothiers, and other cutting edge tenants have left the area in favor of more remote, less trendy locations like NoLiTa (in the northern section of the City Hall/Insurance district) and Chelsea. With its eclectic mix of former industrial buildings and back office/loft properties, Chelsea now boasts an availability rate of 2.1 percent, down from 15.8 percent a year ago, and a rental rate of $31.81 psf, a year-over-year increase of 94.3 percent. Leases signed in Chelsea during the third quarter included CT Corporation's 147,330 square-foot transactions and Sprint Spectrum's 30,000 square-foot deal, both at 111 Eighth Avenue.

Availability rates rose in Hudson square, Lower Sixth Avenue and the Village. Hudson square's increase is largely attributable to 325 Hudson Street, where the entire building became available due to the impending sale by its owner-occupier, Century 21 Department Stores. This back office space, which pushed Hudson square's availability rate to 8.4 percent from 5.9 percent, should provide needed inventory in an area where demand has been outpacing supply.

Although Lower Sixth Avenue's availability rose to 2.2 percent, the increase is negligible. Some had speculated that the area might receive a needed injection of available space when FEGS announced it was moving to the Hudson square district from 650 Avenue of the Americas, but the property was sold and is slated for residential conversion. Immediately to the east, the Flatiron/Union square district posted a decreased availability rate of 7.4 percent. By the end of 1998, however, the district will likely be supplied with more available space, as Guardian Life is selling and vacating 201 Park Avenue South.

Midtown

In the third quarter, Midtown's availability rate retreated to its lowest level since 1985, falling to 7.5 percent from 8.5 percent, while the submarket's rental rate surged to $44.66 psf, marking a new high for the decade. Activity was strong throughout the submarket, with five of six districts experiencing declining availability and all districts posting increased rental rates. With the exception of the West Side, where the rental rate for direct space reached $39.52 psf, all districts registered rental rates above the $40 psf mark. The submarket-wide rental rate for Class A space was $46.40 psf, up 22 percent from a year ago.

In the Upper Fifth/Plaza district, Mitchell Madison signed a 126,550 square-foot deal at 9 West 57th Street. The space they will vacate at 520 Madison Avenue will be occupied by Jeffries & Company, which will move from 650 Fifth Avenue, where its space is probably going to be swallowed by a tenant already in the building. These moves are representative of the building-hopping that has been occurring within the Upper Fifth/Plaza District in 1998. Earlier in the year, Freshfields, currently at 630 Fifth Avenue, leased offices at 520 Madison Avenue; The Jordan Company left 767 Fifth Avenue to move across the street into 9 West 57th Street; and Deltec Asset Management, currently at 535 Madison Avenue, took space at 645 Fifth Avenue.

Not all of the district's roving tenants, however, are making such short-distance moves: Lord Abbett will vacate its current space at 767 Fifth Avenue and move to 150,000 square feet in Jersey City at 90 Hudson Street, a development site that has yet to break ground. For The Trump Organization and Conseco, 767 Fifth Avenue's new owners, losing a tenant may actually be a blessing in disguise, as they are considering converting part of the property into office condominiums. While tenants currently in the building are potential buyers, other owner-occupiers or third-party investors are also candidates.

Downtown

The Downtown availability rate fell to 10.5 percent from the previous quarter's 12.5 percent, resulting in over 2.1 million square feet of net absorption. This drop was fueled by Class A properties, for which the availability rate fell to 8.7 percent from 10.8 percent.

Rents continued their precipitous rise to reach $30.69 psf, a year-over-year increase of 19.7 percent. Class A rents are at $33.19 psf, while Class B properties are asking $26.26 psf. While this is an extraordinary ascent, it is less than the increases that have occurred in Midtown and Midtown South. On average, rents in Midtown are now 46 percent higher than in Downtown.

In Manhattan's largest lease of the decade, the Metropolitan Transit Authority signed a 1.595 million square-foot lease at 2 Broadway and selling its current Midtown home at 10 Columbus Circle to a development partnership for $345 million. Goldman Sachs, meanwhile, continued to expand its New York presence, leasing 666,409 square feet at 180 Maiden Lane. In the past 18 months, Goldman Sachs has leased more than 1.6 million square feet of office space in Downtown Manhattan.

Guardian Life expanded at 7 Hanover square, adding nearly 400,000 square feet to the 449,163 square feet it leased during the first quarter of 1998. Meanwhile, amidst the turmoil in worldwide financial markets, The New York Stock Exchange continued to weigh its space options, with relocation alternatives in Battery Park City and the New Jersey waterfront beckoning. While the volatile stock market may seriously impact the future of Downtown Manhattan's real estate market, the most immediate concern is the continued presence of the NYSE at its current Broad Street location. A move by the NYSE out of the Financial District would completely reshape the economic geography and real estate landscape of Downtown Manhattan.

Meanwhile, The World Trade Center/World Financial Center district's availability rate slipped closer to zero, ending up at 3.3 percent. Rents rose to $36.94 from $34.80 psf, an increase of 6.2 percent for the quarter. The district's continued improvement bodes well for the World Trade Center privatization plan recently finalized by the Port Authority of New York and New Jersey. The Port Authority had long been planning to sell the operating leaseholds at 1, 2, 4, 5 and 6 World Trade Center, but the politics surrounding the sale had temporarily stalled the offering. Despite the recent capital markets fallout, this 11 million square-foot offering is expected to fetch upwards of $1.5 billion and surpass the $1.2 billion shelled out for Rockefeller Center in 1996.