New York City market keeps it real this time around.

New York City's commercial real estate market is poised to overtake the peaks of the dot-com era--and this time it has cushioned itself from any potential crash, according to GVA Williams president and CEO, Robert L. Freedman.

Speaking with REW on the release of the company's end-of-year market report, Freedman said, "This has been a market that has been efficient and orderly. We are not going through a cycle where we have a disproportionate amount of absorption in any one given year.

"Values in New York City continue to rise because of shrinking supply, a robust economy and job growth. The market is organic and, for that reason, it is sustainable."

While it didn't feel like it to many, Freedman says the hey-day of the dot.com was created by an illusion.

"These were enterprises with virtually no history of operating profits and, from a balance sheet perspective, they were fragile. Sophisticated landlords built in insurance premiums in these rentals--the tenants were so marginal that if a credit tenant would pay $40 psf, a dot-com would pay $55 psf. It was truly an irrational market and, in almost every instance, these tenants defaulted and the rental achievement was illusionary rather than real.

"Today, the market is being driven by tenants who are economically viable with a history of operating profits and the real estate market is growing organically. Today, we are achieving the same numbers with tenancy that can redeem the rents--it's real rather than illusionary."

With a proliferation of hedge funds now rolling into the city full of big dreams, many landlords who may have otherwise been tempted by the promise of hefty rents could be forgiven a feeling of deja vu from the dot-com era.

However, according to Freedman, it's like comparing apples and oranges. "First off, hedge funds tend to be relatively small tenants, taking 5,000 to 8,000 s/f so, if you aggregate them as a tenancy, it's not a significant factor in our market. Dot-coms represented a much higher percentage of tenant base and were taking 100,000-200,000 s/f spaces.

"And while hedge funds have not performed nearly as well as expected, they are not going away."

Indeed, Freedman believes the city has learned well from mistakes of the past, a feat that has helped the city elevate itself to its position at the top of the heap among five competing US markets.

Commercial asking rents in Manhattan have risen at twice the speed of five competing U.S. cities, according to the GVA Williams report.

Over the past decade, Manhattan rentals have increased from $29.42 to $46.42 per square foot, reflecting a rise of 57.8 percent.

Over the last ten years, rents in Washington, D.C. increased 40.8 percent to $32.12 per square foot. Los Angeles rents rose 29 percent to $25.70, San Francisco rents increased 22.2 percent to $27.14, rents in Chicago rose 39.5 percent to $24.68, and Boston rents increased only 13.5 percent to $24.96.

While the other markets have definitely improved, Freedman believes New York has leapt ahead with such staggering pace not only because of its place at the global table, but because of its diverse local economy.

"We are not a one crop economy," said Freedman. "Whereas cities like San Francisco have traditionally relied on the tech sector, we have the largest diversified financial sector [in the country], communications and publishing, legal services. We are not immune to a real estate recession, but we are insulated from it.

"New York is a very mature market and the reason we have learned how to manage the market is not necessarily because we are the most enlightened real estate community, but it's the ultimate supply constraint. In a product that's predicated on supply and demand, you've already managed one of the variables and that, clearly, is how we outperformed the other markets."

The latest numbers validate Manhattan's status as America's top venue for commercial leasing and investment, according to Michael T. Cohen, chairman of GVA Williams' executive committee.

"Manhattan's preeminence as an investment venue has now endured through two successive market environments," said Cohen.

"In the first era, which began in 2001, flat inflation expectations and cheap capital sent investment values up. Now, values are continuing to rise thanks to market fundamentals; shrinking supply, increasing rents and job growth. Furthermore, residential conversions in Downtown and Midtown South have depleted inventory."

The GVA report revealed that the value of Manhattan Class B commercial properties has increased so rapidly in recent years that their average sales price of $317 per square foot now exceeds the $274 sales price Class A space traded for at the end of 2001.

And asking rents in Midtown North have risen 12.7 percent in the past year and a total of 19.3 percent over the past two years.

The continuing strength of rents in Midtown North is likely to have effects that benefit Downtown, the outer boroughs and other alternative markets as more and more firms find themselves priced out of Midtown, according to Freedman.

"The recipient of the spillover is going to be Downtown," said the CEO.

Market-by-market snapshot

I. Availability

                4th Quarter 2005   3rd Quarter 2005

Midtown North         8.8%               9.5%
Midtown South         7.9%               8.8%
Downtown             15.3%              15.8%

Overall              10.6%              11.6%

II. Asking Rents (approximate)

                4th Quarter 2005   3rd Quarter 2005

Midtown North        $57.79             $56.87
Midtown South        $36.86             $36.29
Downtown             $34.44             $33.69

Overall              $46.42             $46.01