Manhattan market moving full speed ahead.

The Manhattan-wide availability rate dropped for the ninth consecutive quarter to reach 10.2 percent, and Midtown South surpassed Midtown as the tightest submarket in Manhattan as its availability rate dropped to 8.9 percent from 9.5 percent, according to a first quarter report from Newmark & Company Real Estate.

Weighted average asking rental rates in all three submarkets rose to produce a 6.5 percent increase in the city-wide rental rate to $31.36 from $29.44 per square foot, the highest level of the decade. The most substantial increase was posted in Midtown South, where rents rose 7.5 percent to $23.99 from $22.33 per square foot. Citywide rental rates for Class A and B properties rose to $36.02 and $22.59 per square foot, respectively.

Supply of Available Space is Disappearing Downtown

The Downtown availability rate dropped again during the first quarter, falling to 13.9 percent from 14.5 percent. According to Neil Goldmacher, senior managing director of Newmark, "The continued explosive growth of F.I.R.E. (Finance, Insurance and Real Estate) Downtown has caused an unforeseen rapid absorption of Class A space. The trickle-down has now reached Class B properties, resulting in decreased vacancies across the board."

Complementing this decrease in availability, rental rates for the submarket rose 3.5 percent to $27.21 from $26,28 per square foot. Statistics for the districts mirrored those for the submarket as a whole, as the City Hall/Insurance, Financial and World Trade Center/World Financial Center districts all posted increases in rental rates and decreases in availability rates.

Midtown Rents Surge Higher

Midtown rents jumped to $40.24 from $37.99 per square foot, the largest single-quarter increase this decade. Adding this to the increases posted in the three previous quarters, rents have risen 14.1 percent since March 1997. Driving this increase were Class A properties, which posted a 6.5 percent gain during the quarter to $41.52 from $38.99 per square foot. Class B rents rose 1.3 percent to $25.09 from $24.76 per square foot.

David Falk, senior managing director of Newmark, points out that these increases actually understate the degree to which rents are rising. "A more complete way of analyzing economic changes in the marketplace is not just to look at increases in base rents, which rose 5.9 percent in Midtown last quarter, but to look at the effect of decreasing concession packages. In Class A properties, 'fully loaded' transactions became 17.2 percent more expensive for the tenant community."

Concomitant with this rise in rents was a slight increase in the availability rate to 9 percent from 8.7 percent. This increase can be pinpointed to the return of four large blocks of space to the market during the first quarter: Empire Blue Cross Blue Shield's 980,585 square-foot headquarters at 622 Third Avenue; Bell Atlantic's 800,000 square feet at 1166 Avenue of the Americas; Bates Advertising's 233,800 square feet at The Chrysler Building; and United Nations Development Corporation's 164,207 square feet at 633 Third Avenue. These blocks of space, totaling nearly 2.2 million square feet, offset strong leasing activity to account for the negative 1,330,866 square feet of net absorption posted in Midtown.

Tenants Scouring Market for Space in Midtown South

Midtown South became the tightest submarket in Manhattan during the first quarter of 1998. Its availability rate fell to 8.9 percent from 9.5 percent to produce 745,166 square feet of net absorption. Seven of the submarket's nine districts posted positive net absorption, while Chelsea and Flatiron/Union square experienced increasing availabilities.

Following Midtown's lead, rents in Midtown South posted a sharp increase, as the submarket's rental rate reached $23.99 from $22.33 per square foot. The most salient factor in this increase was activity in Park Avenue South, which replaced Flatiron/Union square as the most expensive district in Midtown South. Rents in the district rose by 9.1 percent to $26.48 per square foot, despite the fact that four large, high-end spaces came off the market during the quarter.

Ziff-Davis leased 337,653 square feet at 63 Madison Avenue; the American Society for Mechanical and Electrical Engineering took 154,000 square feet at 3 Park Avenue; the United Way signed for 60,572 square feet at 2 Park Avenue; and Lally McFarland and Pantello took 51,896 at 200 Madison Avenue.

Ziff-Davis, which recently filed for its IPO and had been considering moving its headquarters out of Manhattan, received a $4.3 million tax incentive package from the City. In exchange, the firm has agreed to create 1,300 new jobs in New York City over the next 22 years. Ziff-Davis also negotiated with the building's owners for upgraded elevator service and a new lobby, entrance and address, as the top half of 63 Madison Avenue will be re-christened 28 East 28th Street.