Year-end picture offers reasons for optimism.

The Manhattan commercial real estate picture for 1996 gives plenty of reason for optimism about the coming year, says a year-end report released by The Galbreath Company. The firm's National Market Report, which covers major metropolitan markets in the United States and Canada, reported slight improvements both nationwide and for Manhattan during the past year.

"The year ended on a positive note for both Midtown and Downtown office districts," said Bruce Mosler, president of Galbreath's Eastern Region. "We expect continued vitality for sales and leasing for the first half of 1997. The recent reduction of the occupancy tax, coupled with the elimination of the New York gains tax on sales, show that the city and state governments are trying to make the city more attractive to tenants and investors alike."

Probably the biggest story in Midtown Manhattan in 1996 was the announcement of plans for the first speculative office construction in several years. Four Times Square is speculative in name only, however, as its 1.6 million square feet are already 80 percent leased to publisher Conde Nast and the law firm of Skadden, Arps, Slate, Meagher & Flom. While some have voiced concern over the impact of the space being vacated by these firms, the Galbreath numbers show that, in general, vacancy levels are relatively low right now in Midtown, for both Class A and Class B space.

Total vacancy rates at the end of 1996 were lowest in the Avenue of the Americas/Rockefeller Center district, at 7.78 percent, compared to 8.38 percent in the West Side district, and just over 13 percent in the East Side, Grand Central and Plaza districts. The Penn Station district vacancy rate was considerably higher, at 21.08 percent, due mainly to Class A availability. At the end of 1996, a user requiring 150,000 square feet of contiguous space in Midtown had some 20 spaces to choose from, down from about 30 a year before.

Rents continued to climb in Midtown, remaining highest in the Plaza district. The average rent for Class A space in that area was $48.22, compared to $39.92 for the Grand Central district, $38 to $40 for Avenue of the Americas/Rockefeller Center, $37.64 for West Side, $35.72 for East Side and $31.01 for Penn Plaza.

Notable Midtown lease transactions in 1996 included the 90,000 square-foot expansion of Sony Corporation at 555 Madison Avenue, First Albany's relocation from 6 East 43rd Street to 63,000 square feet at One Penn Plaza, Thomas Publishing Company's lease of 144,925 square feet at Five Penn Plaza, and two major leases at 150 East 42nd Street: 224,000 square feet to Pfizer and 176,000 square feet to Gruner & Jahr.

Major sales included 220 East 42nd Street, 383 Madison Avenue, 866 Second Avenue, 260 and 261 Madison Avenue, 500 Eighth Avenue, 475 Fifth Avenue, 345 Park Avenue South, 500 Fifth Avenue, 540 Madison Avenue, NBC's purchase of 1.6 million square feet at Rockefeller Center, and Memorial Sloan Kettering's condominium purchase of 210,000 square feet at 633 Third Avenue.

In Midtown, the 261 office buildings tracked by The Galbreath Report had a total net absorption of nearly three million square feet.

Downtown Manhattan continues to see a big upturn in activity. Positive absorption for the second half of 1996 came to 1.93 million square feet, driving the overall vacancy rate down to 19.35 percent, with vacancy rates for Class B space about twice as high as high as for Class A space. Net absorption is likely to stay strong for some time, as major requirements are pending at several companies, according to Galbreath's Executive Managing Director John V. Wheeler, who heads the firm's Downtown office.

Major Downtown acquisitions included 45 Broadway, a 365,000 square-foot building bought by Paramount Group for $75 per square foot. A group of Asian investors represented by Loeb Asset Management bought Two Wall Street for $78 per square foot. Two struggling properties sparked some interest in 1996: Murray Hill Properties purchased the leasehold on the 670,000 square-foot 22 Cortlandt Street (a building that was more than 50 percent vacant), and Stellar Management Corporation purchased 10 Hanover Square, a vacant building that is likely to be converted to a hotel.

Despite the flurry of activity Downtown, rents remained lower than most owners would like. Average asking rent for Class A space topped out at $31.93 per square foot in the World Trade Center/World Financial Center, and ranged between $27 and $30 elsewhere. Class B rents average about $22 per square foot.

"The Lower Manhattan marketplace has enjoyed the benefits of shrinking competition from surrounding markets," Wheeler said, "and the general strength of the local economy has been another positive factor."