Manhattan real estate market cools during fourth quarter.

In the aftermath of the late summer stock market plunge, the Manhattan real estate market cooled during the fourth quarter, with the overall vacancy rate climbing just under one percent from the third quarter to 8.5 percent.

With the local economy expanding at the fastest rate since 1992 and Wall Street rebounding dramatically during October and November, the market malaise should soon be over.

For only the third time in history, employment growth, which accelerated every month in 1998 except September, was stronger in the city than in the nation as a whole. Tourism, construction, computer services, telecommunications and private education picked up the slack amidst volatility on Wall Street, generating a record 90,000 new jobs over the last year.

While consolidations and financial services mergers continue to add small- and medium-sized blocks of space in the first quarter of 1999, Cushman & Wakefield expects a return to positive leasing and net absorption.

Fourth quarter leasing activity, at 6.7 million square feet, was down significantly from 9.9 million square feet in the fourth quarter 1997. Reflecting earlier heavy leasing, year-to-date activity was 33.1 million square fee, down only slightly from last year's record 33.4 million square feet. Only 26 leases for space greater than 100,000 square feet were signed in 1998, compared to 31 leases last year.

A total of 9.8 million square feet of newly available space was added to the Manhattan market during the fourth quarter, 57 percent of it in the Midtown market. Major blocks of space added in the quarter included 420,000 square feet at 875 Third Avenue with a possession date of January 2002; 847,670 square feet at 601 West 26th Street; and 296,550 square feet at 80 Lafayette.

As a result of the fourth quarter slowdown, only 18.7 million square feet was leased in Midtown in 1998, compared to a total of 19.9 million square feet last year. The quarter's largest Midtown lease was signed by Winstar Communications, which leased 230,969 square feet at 685 Third Avenue. Other major fourth quarter Midtown leases included Time, Inc. renting 209,360 square feet at 135 West 50th Street, and Mitchell Madison Group committing to 120,000 square feet at 9 West 57th Street.

Midtown South leasing in 1999 reached 4.4 million square feet, just shy of last year's 4.5 million square feet. The largest fourth quarter leases include Bill Communications, which closed on 132,248 square feet at 345-355 Park Avenue South, and FedCap Rehabilitation Services, which leased 73,600 square feet at 111-119 West 19th Street.

With the Metropolitan Transit Authority's 49-year, 1.6 million square-foot net lease of 2 Broadway topping all leases of the 1990's, Downtown leasing reached 10.1 million square feet in 1998, 1.2 million square feet greater than last year's record 8.9 million square feet.

For the fourth quarter, the top Downtown leases included FDIC renting 123,000 square feet at 20 Exchange Place, and the YMCA Retirement Fund leasing 47,638, square feet at 140 Broadway.

The biggest Downtown news came late in December, when the New York Stock Exchange (NYSE) confirmed it will remain in the heart of the financial district through the year 2100, moving across the street from its current 11 Wall Street headquarters. The NYSE, with the help of $560 million in subsidies (plus the cost of land acquisition), will occupy 650,000 square feet in 15 floors of the new 60-story building, the first to be built in the Financial District in 10 years.

Reflecting the underlying strength of market fundamentals, the Manhattan vacancy rate, at 8.5 percent, was still down 1.3 percent from last year, despite the addition of available space. The Midtown overall vacancy rate fell slightly from 8.9 percent to 8.1 percent, with Class A vacancy dropping from 8.2 percent. The overall vacancy rate in Midtown South fell slightly from 8.4 percent to 8.1 percent, with the Class A rate demonstrating the most remarkable drop from 4.4 percent to 1.3 percent.

Downtown, the overall vacancy rate fell into the single digits to 9.5 percent from 12.4 percent. Affirming Downtown's renaissance, the Class A vacancy rate dropped to an amazingly low 5.2 percent, from 8.8 percent last year.

Direct weighted average asking rents continued to rise throughout 1998, with only a barely detectable dip late in the year. In Midtown, overall rent rose 18 percent from $33.34 per square foot (psf) to $39.37 psf, and the Class A rent climbed 19.4 percent to $46.94 psf, from $32.39 psf last year. The Midtown South overall rent rose 34.6 percent, from $19.26 to $25.93 psf, with the Class A rent rising from $28.15 psf to $30.75. The Downtown overall rent jumped 20 percent from $25.79 psf to $30.95 psf, with the Class A rent up 23 percent to $38.70 psf from $31.46 psf.

With the liquidity crisis in the capital markets equalizing just as 1998 ended, only five new building sales over 200,000 square feet were recorded in the fourth quarter. The larger sale was Equity Office Properties' purchase of 825 Eighth Avenue for $578 million.