Tenants take it to the max in search for high-end space.

Cushman & Wakefield released year-end statistics for the Manhattan commercial real estate market that show strong demand for the city's most expensive office space and declining vacancy rates throughout the borough.

In 2005, Cushman & Wakefield tracked more than 78 completed office leases with rents above $70 per square foot, compared to 48 in 2004 and just eight in 2003. The $70 figure is representative of the higher end of the market, well above the average asking rent of $53 per square foot registered at yearend for New York's most modern and best located office buildings in Midtown.

Throughout the city, the vacancy rate fell to four year lows as more than 10 million square feet of available space was removed from the market. The Midtown vacancy rate declined to 7.8 percent, its lowest level since the third quarter of 2001; Midtown South's vacancy declined to. 7.4 percent, its lowest point since the second quarter of 2001; Downtown's vacancy declined to 10.6 percent, its lowest level since the fourth quarter of 2001.

According to Joe Harbert, Cushman & Wakefield's chief operating officer for the New York Metro Region, "An increase in pricing for the high-end space in the market illustrates the strength of the financial services sector in the economy. The most expensive office space, located for the most part on Fifth Avenue, Madison Avenue and Park Avenue, has been leased primarily by financial services, hedge fund and real estate investment firms. Those are the types of tenants who are growing and competing for this type of space."

Mr. Harbert said that financial services firms remained the most active industry in 2005, leasing more than 4.2 million square feet of office space on deals above 10,000 square feet, followed by law firms at 1.6 million square feet and media companies at 1.4 million square feet.

Among the top leasing deals of 2005 were Citigroup at 485 Lexington Ave., 787 Seventh Ave. and 731 Lexington (750,000 square feet), Bank of America at 50 Rockefeller Plaza (320,000 square feet), American Express Financial Advisors at Three World Financial Center (220,000 square feet), law firm Fried Frank Harris Schriver & Jacobson at One New York Plaza (330,000 square feet), the law firm Ropes & Gray at 1211 Avenue of the Americas (240,000 square feet), and the law firm McDermott Will & Emery at 340 Madison Ave. (170,000 square feet).

Overall leasing activity for 2005 totaled 25.5 million square feet, down from 29.5 million square feet in 2004. According to Mr. Harbert, despite the fact that less new leasing occurred in 2005, the office market tightened due to the fact that "fewer firms gave up excess space, companies that had been marketing excess space for lease took it back off the market and a substantial amount of space was converted to residential use in Midtown South and Downtown."

The nearly $15 difference in average asking rents between Midtown and Downtown at the end of 2004 has increased to more than $17 per square foot at the end of 2005. A class-A space comparison between Midtown and Downtown reveals a $19 per square foot differential, before factoring in economic incentives for companies locating Downtown.

According to Mr. Harbert, "the latest economic incentives package approved over the summer has been making an impact lately. There were several transactions and leases out for Downtown office space at the end of the year, and Downtown saw its vacancy rate decline throughout 2005."

Mr. Harbert pointed out that three of the top 10 Manhattan office lease transactions were closed Downtown in 2005 for a total of about one million square feet. "A further tightening of the Midtown market, combined, with meaningful Downtown incentives, should reinvigorate Downtown Manhattan and its prospects going into 2006," Mr. Harbert said.

Preliminary estimates for the total value of Manhattan building sales in 2005 set another record, reaching $16.8 billion at yearend. The previous record was set in 2004, when about $15.1 billion in commercial space was purchased.

The highest profile sale of the year was the $1.72 billion sale of the MetLife Building to Tishman Speyer Properties. Arranged by Cushman & Wakefield's New York Capital Markets Group, it set the record for a single office building sale.

According to Mr. Harbert, "Commercial real estate investment has really only gone through two phases since the stock market crash of 2000. Initially, money flowed from stocks and bonds to office buildings that had more predictable returns--meaning buildings that were modern and fully leased for the long-term, carrying little leasing risk.

"Interest rates continued their decline to historic lows, and building prices rose to record highs, even as vacancy rates were rising," Mr. Harbert added. "The second phase started when investors, primarily private equity investors, started betting on a turnaround in leasing fundamentals. Taking advantage of low interest rates, they started buying properties that had large blocks of space available to reap the higher returns available through improved occupancy."

In 2005, more than 60 percent of transactions were completed by private equity investors taking advantage of the lower interest rate environment.

As interest rates continue to rise, institutional investors are expected to level the playing field and win their fair share of properties on the market in 2006, said Mr. Harbert.

Retail continues in an upward trend. SoHo remains the hottest retail market as far as activity. Ben Sherman, Massoni and Footlocker all leased space for new locations there during the fourth quarter.

Madison Avenue saw a $6.00 bump in asking rents, with several properties drawing more than $1,000 per square foot. Retailers like Calypso, which took 11,000 square feet at 815 Madison, and Pomellato, which leased space at 741 Madison, showed interest in the area, lowering the vacancy rate to 7.7 percent at yearend, from 10.5 percent at the end of the second quarter 2005.

Rents on the Upper West Side along Broadway also jumped from $242 at the end of the third quarter to $264 at yearend, due to the development of 1880 Broadway, which came to the market with asking rents ranging from $350 to $450 per square foot.

Tenants continue to show interest in Times Square, not only for the tourism and foot traffic, but also seeing the new residential development there and west of Eighth Avenue.

At the end of 2005, the level of interest for high-profile corner spaces in Manhattan by banks slowed slightly. While there remains substantial competition to lease these corner locations, the pause by the banks has been noted, and it remains to be seen if this trend will continue into 2006.

OFFICE MARKET STATISTICS BREAKDOWN

MANHATTAN        4Q '05    3Q '05    4Q '04    4Q '03

Total Vacancy    8.4%      9.6%      11.0%     12.5%
Sublease Vac.    1.6%      2.0%      2.5%      3.3%
Overall Rent     $40.58    $41.35    $39.55    $40.53

DOWNTOWN         4Q '05    3Q '05    4Q '04    4Q '03

Total Vacancy    10.6%     11.5%     13.7%     13.5%
Sublease Vac.    2.1%      2.1%      2.8%      2.8%
Overall Rent     $30.89    $31.09    $31.55    $36.92

MT SOUTH         4Q '05    3Q '05    4Q '04    4Q '03

Total Vacancy    7.4%      8.1%      10.2%     13.3%
Sublease Vac.    0.6%      0.6%      1.5%      3.2%
Overall Rent     $33.63    $33.58    $31.34    $30.37

MIDTOWN          4Q '05    3Q '05    4Q '04    4Q '03

Total Vacancy    7.8%      9.3%      10.1%     11.9%
Sublease Vac.    1.7%      2.3%      2.6%      3.6%
Overall Rent     $47.41    $48.06    $45.98    $45.37