Tightening in office market prompts tenants to re-evaluate space issues.

The dynamic conditions that characterized Manhattan's office market throughout 1997 have continued well into 1998. The combination of solid and prolonged economic growth - both nationally and locally - and the absence of new supply, has generated steady demand for commercial real estate in the New York City market and created increased competition for the limited existing supply.

During the first quarter of 1998, net absorption for all office buildings combined in New York City reached an impressive 1,665,033 square feet. As a result, the City's overall vacancy rate slipped to 11.1 percent compared to 11.5 percent at the end of 1997. Although these figures represent a slight slowdown in the rate of decline in overall availability compared to the record levels experienced in 1997, it is not reflective of dwindling corporate demand. Instead, it is indicative of the scarcity of quality space in submarkets throughout the City. Several tenants, particularly those in the securities, insurance, and financial industries, are actively seeking expansion and relocation space, but due to limited options, are having a hard time closing deals.

In Midtown, the Class A availability rate slid from 9.23 percent to 8.3 percent during the first four months of 1998, while Class B availability slid from 11.38 percent to 9.86 percent. In Lower Manhattan, Class A availability fell from 15.23 percent to 14.38 percent during the same four-month period. In fact, the Downtown Class A availability has plunged by nine percentage points since the first quarter of 1996, when it was 23.4 percent. In effect, more than five million square feet of Downtown Class A space has been absorbed by the financial community in just over two years. The significant change in such a short period of time illustrates how rapidly the market is moving and how important it is for tenants to consider their space planning so they can recognize opportunities and be able to act on them quickly when they arise.

Responding to the tightening market conditions, landlords are flexing their negotiating leverage in the form of higher rental rate. During the first four months of the year, Class A average asking rental rates in Midtown rose from $38.27 per square foot to $40.62 per square foot, while rents in the Downtown Class A market escalated from $29.27 per square foot to $31 per square foot.

With Midtown rents continuing to escalate, many small and mid-size space users are now giving greater consideration to opportunities in the resurgent Midtown South and Downtown markets. As Midtown rents continue to edge upward, Midtown South has gained greater acceptance as a corporate business location. Diverse tenants are flocking to this submarket because of its lively ambiance and more affordable rental rates. Class A rental rates in Midtown South now average $29.49 per square foot, while rates for Class B product have risen to $23.14 per square foot. Much of the activity in Midtown South is being fueled by technology-based and start-up companies seeking alternatives to inflated Midtown rents and dwindling opportunities.

Competition for Downtown space has also been heated so far this year, and that trend is likely to continue for some time. The strength of Wall Street and the expansion of firms that service it continue to produce healthy leasing activity in the Downtown market. Institutional users such as securities firms are driving Downtown's expansion to a large degree.

In response to the lack of space throughout Manhattan, some tenants are considering relocating various divisions to nearby suburbs. For instance, Citicorp is moving its data center to Fort Lee, NJ, while OMI Corp. is moving about 20,000 square feet from 90 Park Avenue to Stamford, CT, and Unilever is relocating most of its employees from Park Avenue to its existing facility in Trumbell, CT. While this is not good news for the City, it is not bad news either. Relocations outside of the City are happening, but most relocating tenants are staying within the New York metropolitan area. Despite the lack of space for expanding tenants, the City remains the hub of commerce, and as businesses move to the local surrounding areas, New York City will continue to benefit.

As Manhattan's commercial real estate market continues to tighten and demand for office space increases, high quality commercial space has become a much-coveted commodity throughout the City. As a result, businesses of all sizes are paying closer attention to space planning issues. Companies are looking for ways to make their offices more efficient in an effort to maximize space and reduce costs.