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Financial markets raise concern, but overall activity remains strong.

While it is apparent that the recent fluctuations in the financial markets has caused some concern among lenders and investors, tenant confidence remained strong in both the Midtown and Downtown sectors of Manhattan's office market.

According to the third quarter 1998 Studley Report & Spacedata, 13.2 million square feet of space was leased in all buildings - an increase from both second quarter 1998 and third quarter 1997 activity - and resulted in a year-to-date total of 33.9 million square feet leased.

"Echoing the consistent rent increases seen in previous quarters, the average rental rate offered for all classes of office space in Midtown rose $2.38 per square foot between the second and third quarter, to reach $32.76, an increase of nearly $5 per square foot from this time last year," noted Maurice H. Solomon, a vice chairman on Julien J. Studley, Inc.'s board of directors and branch manager of the firm's Midtown office

The continued lack of available space in Midtown squeezed the Class A vacancy rate down to 3.3 percent this quarter from last quarter's 4 percent, with 1,400,171 square feet leased. However, Class B space greatly benefitted from the tight Class A market, accounting for 3,552,551 square feet of leasing activity and a tightening from 6.4 to 5.4 percent vacant. The average asking rental rate for Class A space increased by $3.23 per square foot to reach $49.01 between the second and third quarters, and Class B rents increased by $2.24 per square foot, to reach $39.67.

The highest average rental rates offered for both Class A and B space were reported in the Plaza II submarket, where building owners asked an average of $56.01 per square foot for Class A space, and $44.82 for Class B space.

"The turmoil in the financial markets at the end of the third quarter has created a subtle change in psychology in the real estate industry, prompting some uncertainty and caution in the marketplace," observed Solomon. However, he pointed out that Midtown remained vibrant with major commitments this quarter, including Time Warner Inc.'s lease for 752,000 square feet at the New York Coliseum site; Debevoise & Plimpton's 416,142 square- foot lease at 919 Third Avenue: Time, Inc.'s 220,893 square-foot lease at 135 West 50th Street: and Phillips Van Heusen's 132,247 square-foot lease at 200 Madison Avenue.

Continuing its remarkable recovery, Downtown leasing activity in the third quarter, at 5.6 million square feet, reflects a 40 percent increase as compared to last year at this time. More than 11 million square feet have been leased year-to-date, signaling that the market, is well ahead of 1997's total of 2.1 million square feet leased.

Accordingly, vacancy rates continued to decline, with the overall vacancy rate dropping from 8.9 percent in the second quarter to its current 7.4 percent, representing a 42 percent decline from one year ago. The scarcity of Class A space has been even more dramatic. In Downtown's better buildings, the vacancy rate in that sector of the market dipped to 3.9 percent, a 48 percent drop from one year ago and a 25 percent decrease from last quarter.

Noted George J. Martin, vice chairman and branch manager of Studley's Downtown office, "A common theme pervading the market has been the scarcity of space, which has forced many large tenants to stay and expand, if possible, at their current locations." Three prominent law firms all made such decisions: Milbank Tweed at 1 Chase Manhattan Plaza; Brown & Wood at 1 World Trade Center; and Hughes Hubard & Reed, at 1 Battery Park Place. Similarly, in the financial services sector, Keefe, Bruyette & Woods, and Weiss Peck & Greer both repositioned themselves at 2 World Trade Center and One New York Plaza, respectively.

"The Metropolitan Transit Authority's 49-year net lease for the entire 1.5 million square-foot 2 Broadway building displaced other tenants that were in competition for the space, and will have ripple effects throughout the market," Martin added.

The strength of the Downtown real estate market has so far countered the economic crises overseas, the recent political sensitivities in the United States and the nervous stock market. Based on current market conditions, the fourth quarter of 1998 is expected to bring significant leasing activity at higher rental rates, simply because of the lack of existing product and limited new construction.
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Title Annotation:market turmoil affects real estate industry
Publication:Real Estate Weekly
Article Type:Industry Overview
Geographic Code:1U2NY
Date:Oct 28, 1998
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