Mixed signals define the '95 market.

The Midtown Manhattan commercial real estate market ended 1995 amid mixed signals. After two years of strong leasing levels, there was a noticeable slippage in activity over the past 12 months. The 16.7 million square feet of space leased in 1995 represents a 22 percent decline from the 21.5 million square feet leased in 1994 and a 16 percent decline from the 19.8 million square feet leased in 1993.

Despite this slowdown, however, a number of significant transactions were completed which served to push the vacancy rate down, currently hovering on the cusp of single digits at 12.7 percent. Overall, several market trends emerged in 1995, setting an optimistic tone for 1996.

One surprising trend was the uptick in the number of leases signed for 400,000 square feet or more. While the overall volume of transactions tapered-off in 1995, according to the year's list of top ten leasing transactions, five of the top 10 deals in 1995 were greater than 400,000 square feet, compared to only one in 1994, while no deals of this size were completed in 1993. This indicates that major space users are resolved to locking-in current rates for the long-term, and are committed to remaining in the City, as was the case with Equitable Life Assurance Society and Avon, who both considered suburban alternatives. Furthermore, enticements by Mayor Guiliani's pro-business government were successful in retaining several large tenants, including General Motors.

1995 also witnessed a number of tenants trading in a prime address for a less prestigious Midtown building in exchange for a more economical and efficient operation. Unlike the excessive spending on luxury offices in the '80s, the '90s, corporate directives to trim bottom-line expenses has reversed the flight-to-quality space trend, as high-profile tenants relocate to Midtown's outer boundaries, such as the well-publicized transactions completed by C.S. First Boston and FCB/Leber Katz & Partners.

As a result of this activity, pockets of quality space have opened-up in Midtown. A number of mid-sized companies requiting up to 80,000 square feet are slowly absorbing space vacated by larger tenants. For instance, Freedom Forum, Inc. will relocate a division of its operations from Columbia University to 53,000 square feet of space at 590 Madison Avenue formerly occupied by IBM. Amhold and S. Bleichroeder, Inc. recently relocated from Lower Manhattan to approximately 80,000 square feet at 1345 Avenue of the Americas, in a sublease from Alliance Capital for floors formerly occupied by Smith Barney and Kronish Lieb Weiner Hellman, LLP.

This movement among quality space users indicates, overall, a relatively flat marketplace. The level of available Class A space has remained nearly unchanged over the past year, averaging 7.5 million square feet. The average asking rental rate for Class A space in Midtown was $44.24 per square foot by year-end 1995, only slightly higher than the $44.01 per square foot offered in 1994. Nonetheless, the Midtown office market is tightening, as evidenced by the measurable decline in space offered for lease over the past four years. In 1991 there was approximately 52 million square feet of space available. Today, that statistic has fallen significantly to only 36.4 million square feet offered.

Other significant relocations involved several major tenants relinquishing the cache of a Park Avenue address for more unitarian spaces situated primarily along the West Side sub-market. For instance, Union Bank of Switzerland, the Industrial Bank of Japan and Ernst & Young all fled this prestigious Avenue for premier space at 1345 Avenue of the Americas, 1251 Avenue of the Americas and 787 Seventh Avenue, respectively. These departures served to increase Park Avenue's year-end vacancy rate to approximately 10.2 percent, up from 8.8 percent estimated at year-end 1994. On the other hand, the steady lease-up of Mutual of America's newly renovated 320 Park Avenue is a positive sign of Park Avenue's staying power.

Information technology has placed new demands on the office market, as more companies employ technology to conduct efficient and productive operations in the current fast-paced economy. As a result, more than ever, office space users of all sizes are focused on a building's technological capabilities. While this issue has been more prevalent in Downtown New York, several Midtown landlords of properties constructed prior to the 1970's are encountering increased competition from a host of new buildings offering state-of-the-art infrastructures. In an effort to preclude tenant departures driven by outmoded buildings, it is likely that these owners will begin to buckle down over the next five years and invest in building upgrades, improvements and renovations. The retro-fit of the aforementioned 320 Park Avenue is indicative of what ultimately will be required of older buildings in order to retain and attract tenants in the 21st Century.

Moreover, the continued flight to Midtown's West Side marketplace, which boasts a newer, technologically equipped inventory of buildings, is further evidence of this demand for high quality space. Over the past few years, West Side vacancies have continued a downward trend. The Class A vacancy in the West Side sub-market (Fifth to Eighth avenues from 42nd to 59th streets) is 6.7 percent, while the overall vacancy is 7.6 percent. Meanwhile, the vacancy for Class A space on the East Side (Fifth to Second avenues from 30th to 60th streets) is 11.1 percent, and the overall vacancy is 12.7 percent.

News of Durst's sooner-than-anticipated speculative construction project on 42nd Street, and rumors of two major tenants committing to Howard Ronson's 383 Madison Avenue, are likely to stir-up the marketplace in 1996. Another encouraging sign that the market is experiencing sustained recovery is the positive outlook for new job gains, propelled by technology-based industries such as entertainment, media, telecommunications industries as well as financial service companies.

On the other hand, contraction of the banking industry will continue, resulting in more mergers and acquisitions. As information technology creates new job opportunities, driving the city's job base, the decline in manufacturing-based jobs will become increasingly apparent as the year 2000 approaches.

Looking ahead, the Midtown commercial real estate market will witness continued recovery in 1996, fueled by the strengthening economy. Leasing activity is anticipated to mirror levels experienced in 1995, with the overall vacancy closing in on single digits. By mid-year, a slight increase in rental rates is anticipated, as owners gain more confidence in the marketplace. Sub-markets expected to be active in 1996 include Midtown South, where a host of technology-related firms are emerging, including software, publishing and graphics firms; the Grand Central hub; and the West Side sub-market, particularly the Times Square area.