Studley 3Q report highlights lowest vacancy rate since 2001.

With demand still outpacing supply for office space in Manhattan, the space crunch in Midtown and other sought-after submarkets--as opposed to the credit crunch--continues to dominate local headlines relating to commercial real estate.

With a vacancy rate just below 5%, the lowest level since the second quarter of 2001, and with rental rates continuing to increase, although marginally this quarter, there seems to be very little immediate impact due to the nation's credit crunch in New York, according to international commercial real estate services firm Studley's 3Q 2007 Studley Report.

"New York City's leasing market has, so far, been insulated from the financial tsunami that's wreaking havoc across the country," said Steven Coutts, Studley senior vice president, National Research Services.

"Investment sales have clearly taken a direct hit, but leasing velocity, which has been running 10% to 15% below historical averages since the fourth quarter of last year, has slowed as a result of transactions that were signed in 2005 and 2006 that included ample space for growth. If there's concern amongst tenants, it's more a crisis of confidence during this first rough patch in our economy, which has been exceedingly healthy since 2004."

The report asserts that New York City would have to lose at least 45,000 jobs before vacancy rates would approach the 8.0% rate, considered to be the point of equilibrium for Midtown Manhattan.

"Confidence could erode further if top financial firms contract space requirements, cut payrolls and put big blocks of space on the market," added Coutts, "but firms that have been warehousing space over the past two years are not likely to put it back on the market until they have a better understanding of where the economy is headed. It's just too soon to know for sure."

Most top Wall Street firms have reported forthcoming drops in profits and some layoffs due to the subprime mortgage debacle. Lehman Brothers, for example, recently closed its subprime mortgage unit in California. New York City employees in structured finance and the mortgage industry could be hit the hardest once the full drop in revenues is determined.

While financial services firms have not been as active in the third quarter, 6.5 million square feet of deals were still signed by expanding companies and new entrants to the market.

Interestingly, Class B properties dominated leasing activity this past quarter, largely due to the tightness in the Class A market. Also noteworthy is the continued migration from midtown to downtown of firms seeking more affordable rental rates. At the same time, hedge funds remained active, raising the bar for rent paid for trophy space even higher, some paying well above the $150 psf mark.

Rental rates posted the smallest quarterly increase since the second quarter of 2006, increasing 2.6% overall to $63.56 at the end of the third quarter from $61.96 at midyear. Class A rents jumped 4.1%, rising to $88.84 from $85.38.

Availability decreased in the third quarter to 7.0%, down from last quarter's 7.3%. Downtown now has only 1.9 million square feet of Class A space available, due to both absorption and the removal of 95 Wall Street from inventory. Midtown's availability, however, remained unchanged at 6.6% overall, while Class A availability posted at 6.2%--a somewhat misleading statistic the Studley Report notes since much of the space won't be available for occupancy until the first or second quarter of 2008.

Decidedly, Manhattan's strong economy and limited supply of office space have managed to insulate the city from the subprime mortgage crisis. Although job growth slowed somewhat this past summer, with the city losing 5,200 private sector jobs from July to August, industry segments that fuel demand for office space posted the largest annual job gains in August--14,300 jobs in the professional and business services and 10,500 jobs in financial services.