Manhattan's office market cools off.

The nation's economic slowdown began to rear its ugly head in Manhattan's office market in the first quarter of 2001. A large amount of sublease space hit the market recently, which could mean that many tenants are not achieving their own predicted growth rates and in an effort to cut costs, have returned space to the market.

Manhattan experienced the largest one-month gain in office sublease space in several years, in the first quarter, particularly in the month of February. In March, direct space was the culprit, causing most of the 930,000 SF of negative absorption.

After months of holding steady, the overall availability rate for Manhattan office space rose from 5.5% in the beginning of the first quarter to 6.1% at the end of the quarter, substantiating prior fears of a sublease glut. However, even with the rise in availability, the first quarter rate in 2001 is still approximately one percentage point lower than it was one year ago. Midtown South' s current availability rate at 7.5% is higher than the Midtown and Downtown rates; which are 5.7% and 6%, respectively.

A total of 1.2 million SF of sublet space was added to the overall Manhattan office market, but surprisingly, the space is not being offered solely by failing dot-coms. The National Association of Securities Dealers (NASD) has offered a 128,000 SF block at 33 Whitehall St. and the Venator Group (formerly The Woolworth Corporation) is subletting its 84,000 SF headquarters at the Woolworth Building. Dot-coms also contributed to the growing availability rate as in the case of Kozmo.com, which put out 50,000 SF for sublease in February.

Overall class "A," "B," and "C" asking rents remained flat, at $56.54 per SF. Closer inspection reveals that class "A" rents actually increased slightly, while class "B" rents decreased. This suggests divergent paths traveled amongst properties of varying locations and amenities. Further supporting this notion is the fact that 78% of the 1.9 million SF in negative absorption occurring in the first quarter of this year can be traced to class "B" space.

The first quarter's average asking rental rate in Midtown was $65.18 per SF, while space in Midtown South and Downtown was considerably lower at $45.41 and $46.52 per SF, respectively. While widespread and substantial reductions in asking rents have not yet occurred, net effective rents are easing down with the offer of more generous concession packages by landlords.

As the market shifts into an equilibrium growth remains positive, but at a slower rate, with such transactions as Paine Webber's pre-leasing 1.1 million SF at Newport Office Center VII, Allen & Overy leasing 135,000 SF at 1221 Ave. of the Americas, Boston Consulting leasing 80,000 SF at the to-be-renovated 430 Park Ave., Golden Sachs leasing 385,200 SF at 77 Water St., Institutional Investor leasing 113,235 SF at 225-233 Park Ave. South, and Sprint leasing 100,000 SF and 360 Networks leasing 75,900 SF at 111 8th Ave.