Manhattan availability rate inches up in 1Q.

According to statistics compiled by Newmark & Company Real Estate, Inc., the build-up of space on the market continued to wear on Manhattan market fundamentals in the first quarter of 2003, pushing up the availability rate from 14.1%, at the end of 2002, to 14.6%.

In the limited activity that took place, tenants signed deals to lock-in both favorable rental rates and increased owner concession packages. During the first quarter, the direct availability rate in Manhattan increased from 9.3% to 9.9%, while the sublet availability rate remained steady at 4.8%. Net absorption this past quarter was negative (2,076,308 SF), with 2,062,568 sf added to the direct market. Average asking rents in Manhattan fell to $40.10 psf from $40.93 per SF.

In Midtown, the overall availability rate rose to 13.2%, the highest rate since year-end 1995. Approximately 815,100 SF was returned to the direct market during the quarter, which pushed the availability rate up from 12.9% to 13.2%. Meanwhile, the sublease availability rate fell from 4.6% to 4.5%. Asking rental rates continued to drop in Midtown: overall asking rental rates have tumbled to $50.93 per SF, from $57.23 at year-end 200.1.

Overall, approximately 552,615 SF was returned to the market in Midtown during the first three months of the year: 815,100 SF was added to the direct market, while 262,485 SF was removed from the sublease market. This was the first time in two and half years - or 10 consecutive quarters - that the Midtown sublease market recorded positive net absorption. Nonetheless, there are still 29 blocks of contiguous space measuring more than 100,000 SF listed at the end of the first quarter, up from 27 at the end of 2002. This does not include several blocks of "shadow space," which remain unlisted by publicly owned companies in order to avoid reporting losses that would negatively impact earnings.

Midtown leasing activity was in a slump, as only 1.4 million SF was leased during the first quarter of 2003, compared with 3.7 million SF during the same quarter in 2000. Nonetheless, five leases for more than 100,000 SF were signed in Midtown during the first three months of this year; as companies capitalized on the current market conditions to secure large blocks of high-quality space at favorable lease terms.

Pfizer, Inc. led the way by expanding into 274,603 SF at 685 Third Ave. at below-market rents, taking over the lease that Aon Corporation had signed after losing its offices at the World Trade Center. The law firm of O'Melveny & Myers, which recently merged with O'Sullivan, leased 206,958 SF at 7 Times Square and will now consolidate its two existing offices into new and efficient space at the Boston Properties building, currently under construction in Times Square. Meanwhile, Microsoft signed a lease to relocate and expand into 100,380 SF at 1290 Avenue of the Americas, and IBM renewed its lease for 168,763 SF at 590 Madison Ave. when the owner offered discounted rental rates as well as lease provisions.

Taking advantage of the soft market conditions, opportunistic tenants are strategically consolidating, upgrading and/or renewing space in Midtown at very attractive rates.

The availability rate in Midtown South increased from 14.6% to 15.2% during the first quarter of 2003. The direct availability rate increased from 9.9% to 10.5%, as 749,531 SF was placed on the direct market. The sublease market posted more stable results, as 18,974 SF of sublet space was taken off the market, holding the sublease availability rate at 4.7%. Average asking rental rates dipped below $30 per SF for the first time since the third quarter of 1999, falling from $30.79 psf to $29.11 per SF. An overabundance of sublease space continues to place downward pressure on market fundamentals. For the first time since the third quarter of 1999, overall average asking rental rates in Midtown South fell below $30 per SF. Rents sank to $29.11 per SF, as owners continue to compete with sublease space offered at a discount. Asking rents in Midtown South have fallen 40%, since peaking at $40.98 per SF two years ago. The majority of these subleasing transactions tend to be long-term deals for built-out space that i s comparable to, if not more enticing than, direct space in the same building. Sublessors are willing to significantly reduce the rent on space, as they do not have a long-term financial interest in the buildings they occupy.

The drop in net effective rental rates - due to free rent, higher tenant improvement allowances and other concessions by owners - has allowed a more diverse group of tenants, those that had previously been unable to consider relocating or expanding, to sign new leases. During the first quarter, various not-for-profit organizations took advantage of the current market conditions including Community Preservation Corporation (35,000 SF) at 63 Madison Ave., Doctors Without Borders (22,000 SF) at 333 Seventh Ave. and New York Cares (10,000 SF) at 214 West 29th St.

The Downtown office market posted an overall availability rate of 17% at the close of the first quarter: the direct availability rate rose from 10.8% to 11.4%, and the sublet availability rate increased from 5.3% to 5.6%. Asking rental rates remained relatively stable, shifting from $35.60 per SF to $35.72 per SF, which is a 10% decrease from year-end 2001, when rental rates were approximately $40 per SF. The future of Lower Manhattan remains uncertain. Average weekday subway ridership is down 23% since 2000, tourism has declined, multiple retail storefronts on Broadway are vacant, and several large blocks of office space became available during the first quarter of 2003. On a positive note, the demand for residential space continues to be strong and Downtown building owners are responding by converting their commercial properties into, apartment buildings following the departure of major corporate tenants. This is the case at both 10 Hanover Square,. a 522,800-SF building which Goldman Sachs & Co. will vacat e in 2004 and 63 Wall St., the 409,000-SF former home of Brown Brothers Harriman.