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Manhattan office market overview.

These days I hear a lot of clients asking, "What is the state of the market?" Most firms are inclined to give a general or simplistic answer like "hot" and "landlord's market." We, however, respond by asking "What segment of the market?"

The reality is that there are many markets in just Midtown alone that have different characteristics and drastically differing levels of performance. A tenant that is looking for 30,000 square feet in a typical building in Midtown will have more options than it will know what to do with. A recent survey for a 25,000 square foot client produced 32 acceptable properties between Third and Sixth Avenue, from 42nd Street to 57th Street.

On the other hand, it is hard to find a good 10,000 square foot space in newer first class buildings. There are radical differences in vacancy and rental rates in the various sub-markets. While the Penn Station sub-market has a vacancy and asking rent of 17 percent and $24.09, the Park Avenue figures are 6.5 percent and $44.19, respectively.

If there is a generalization that applies, it is that the market for quality properties are performing far better than the average. For example, the average asking rent for space in Midtown North (north of 42nd Street) is $34.33, versus the average asking rent of the "Top 65" buildings in Midtown of $44.61 per square foot. ("Top 65" represents a subjective selection of buildings that represent very good, institutional grade properties.)

Most people are not aware that New York, unlike most markets in the U.S. where almost 50 percent of the office space was built in the 80's, has a stock of space that is very old. Approximately 45 percent of the space in Manhattan was built before World War II, and only 15 percent of the space was built after 1979. This is quite a surprising statistic for those who witnessed the huge development spurt of the 80's.

With that said, for the first time since 1986, we have witnessed Midtown Manhattan's office market vacancy rate hit below 10 percent. Over the last two years Midtown Manhattan, (north of 42nd Street) has experienced a steady recovery, with vacancy rates declining from 14 percent at year end in 1992 to 12.5 percent at year end in 1994 - and currently at 9.6 percent.

The reason? Numerous small to mid-sized office tenants in the legal, entertainment, software and financial advisory sectors have brace Midtown Manhattan as their headquarters due to quality buildings, attractive rents and access to the world financial market. The leasing activities from these businesses have more than offset the losses from corporate restructuring and consolidations.

Limited supply of new, high quality buildings in Manhattan, with only 15 percent built after 1979 has also contributed to this trend. This, combined with the attractive rents, have increased the demand for Class A office buildings.

The desire for a Midtown Manhattan address is also a factor. With an influx of business from industries including law, advertising and financial services, the prestige and convenience of a Midtown Manhattan address more than offsets the lower rental rates in Downtown Manhattan.

Another market segment that is tight is the market for large blocks of space. There are 17 buildings that can accommodate tenants who need at least 100,000 square feet of space; and less than half of them can accommodate tenants who need more than 300,000 square feet. Large blocks of pace have not been this scarce since 1987.

CBC/Torto Wheaton Research (TWR), CB Commercial's econometric forecasting group and the nation's leading market research firm in the area of commercial real estate, projects that the overall market vacancy rate will continue to fall over the next two years, with the rent inflation expected to average 2.7 percent over the same period. With that said, we expect the better properties to far outperform the average 2.7 percent increase.

While there is strong demand for well-located space, many budget conscious companies will look in the outlying areas as the vacancy rate in the core of Midtown drops further. TWR forecasts that outlying sub-markets including Columbus Circle, West Midtown South and the Times Square area will show the greatest improvements in occupancy.
COPYRIGHT 1996 Hagedorn Publication
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Copyright 1996, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Publication:Real Estate Weekly
Date:Oct 16, 1996
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