Midtown South market picked up in May, report says.

Activity in the Midtown South office market, which has languished for months, picked up in May with the completion of. a half million SF of leasing. Minimal space returns also prompted improved, though still slightly negative, absorption levels during the month. Meantime, a sharp decline in Midtown's activity and Downtown's continued slow-and-steady pace were no match for new available space, and each market recorded significant negative absorption in May as a result.

Led by St. Vincent Hospital's 105,000-SF lease at 450 West 33rd St., Midtown South recorded 470,000 SF of activity in May, well ahead of May 2002's slumbering pace of 170,000 SF. In another major commitment, Donovan Data Systems, Inc. renewed 115,000 SF at 115 West 18th St. But this increased activity was not enough to counter the available space that came on the market, including 274,000 SF of non-contiguous sublease space at 7 West 34th St., offered by Health Insurance Plan of Greater New York. (The company had already announced its relocation to 55 Water St., where it leased 486,000 SF this past April.) All told, Midtown South tallied 70,000 SF of negative net absorption in May, less than half the negative 170,000 SF recorded a year ago.

Midtown's nascent leasing recovery stalled last month, with 600,000 SF of activity in May--down 25% from 800,000 SF leased in May 2002. Despite several sublease withdrawals--including 116,000 SF removed by Credit Suisse First Boston at 237 Park Ave. and 118,000 SF removed by Lehman Brothers at 399 Park Ave.--Midtown saw 440,000 SF of negative net absorption in May. Sixth Avenue/Rock Center accounted for two-thirds of that total, primarily due to JP Morgan Chase's new 252,000-SF sublease at 1211 Avenue of the Americas.

In Downtown, no transactions were completed for more than 26,000 SF last month, resulting in just 250,000 SF of activity, on par with 240,000 SF leased last year at this time. Newly available space, including Prudential Securities, Inc.'s 225,000-SF sublease at 199 Water St., precipitated 360,000 SF of negative net absorption in May, a major reversal from 590,000 square feet of positive net absorption in May 2002.

Highlights of Insignia/ESG's June 2003 "i on the market" reports include:

* Availability increased in all markets in May: up 0.2 points in Midtown to 12.3%; up 0.4 points in Downtown to 14.3%; and up 0.1 point in Midtown South to 13.7%.

* Average asking rents declined $0.41 per SF in Midtown to $50.31 per SF. Downtown, average asking rents held firm, increasing just $0.08 to $34.08 per SF, while average asking rents in Midtown South rose $0.23 to $31.58 per SF.

* Large contiguous available blocks remain plentiful. There were eight blocks larger than 250,000 SF in Midtown and six in Downtown on the market at the month's close, with only one available in Midtown South.

According to Insignia/ESG's June 2003 "i on the market" report for Midtown:

Major transactions for the month included Alston & Bird LLP's 107,000-SF renewal and expansion at 90 Park Ave. and New York Mortgage Company's 66,000-SF sublease from Pricewaterhouse-Coopers at 1301 Avenue of the Americas. Midtown's year-to-date leasing activity totals 4.71 million SF, a 16% improvement over last year's 4.07 million SF of leasing through May. Companies continue to shed surplus space, however, and 2.93 million SF or negative net absorption so far in 2003 remains on par with 2002's negative 2.59 million SF during the same period. With this steady decline in occupancy, Midtown's availability rate reached 12.3% in May, the market's highest overall rate since October 1996. All but one Midtown submarket maintains availability rates north of 10%, but Sixth/Rock's rate--up 0.7 points to 9.7% in May--seems poised to join the others. Average asking rents ranged from a low of $34.70 per SF in Times Square South to a high of $68.50 per SF in the Plaza District.

According to Insignia/ESG's June 2003 "i on the market" report for Downtown:

Downtown continues to lag last year's pace, with a lower volume of deals and smaller transactions prevailing. Year-to-date leasing of 1.85 million SF remains 32% behind 2002's 2.71 million SF of leasing through May. Still, there are encouraging signs that the market is regaining some interest; Downtown's largest transaction in May--a 26,000-SF lease by Jones, Hirsch, Connors & Bull PC at 1 Battery Park Plaza--is a relocation from Midtown. In addition, Downtown's net absorption remains starkly improved. To date in 2003, Downtown has tallied 80,000 SF of positive net absorption, compared with 1.59 million SF of negative net absorption during the same period in 2002. Although availability continues to inch higher, the current rate of 14.3% is only slightly higher than May 2002's rate of 14.1%. Average asking rents remain highest ($48.51 per SF) in the World Financial Center submarket and lowest ($26.67 per SF) in City Hall.

According to Insignia/ESG's June 2003 "i on the market" report for Midtown South:

Thanks to last month's burst of activity, year-to-date leasing in Midtown South--at 1.94 million SF--has surpassed the 1.86 million SF leased during the same period in 2002. Additionally, the market's negative net absorption has declined by two-thirds to 380,000 SF, compared with 1.12 million SF last year at this time. But Midtown South faces a long road to recovery.

Available supply is hovering around 10 million SF, a level not seen since late 1996. Availability rates in the Flatiron District and Chelsea--at 18.5% and 18.2%, respectively--are dangerously close to, and could end up exceeding, the 20% mark that was more typical during Midtown South's pre-tech-boom years in the mid- to late 1990's. Average asking rents ranged from $37.12 per SF in Hudson Square/Tribeca to $25.72 per SF in Chelsea.