New York metro area is primed for growth.
The non-CBD markets will stabilize, with vacancy rates remaining at essentially the same levels as today in most areas. Rents will rise by approximately five percent annually in both the CBD's and non-CBDs. The rise can be attributed to the lack of supply in the CBD's, while new construction will drive up rental rates in the non-CBD's.
The New York regional economy has remained strong into 1997. Job growth is averaging over one percent across the region, with more jobs being added in the suburbs than in the City. Durable goods, retail trade and the service sector are driving the growth in the suburbs, while the securities and services industries are responsible for the growth in New York City.
While the region as a whole remains one of the most costly in which to conduct business, the pool of skilled labor, its access to international markets, and the growing new media industry in the area have kept the region one of the most attractive in the country. Export-related industries are thriving, and the warehouse/distribution market has become tight in the suburbs. Retail sales are on the rise, as Wall Street profits pump more money into consumers' pockets.
Through the year 2000, population growth is expected to average 0.6 of a percentage point, while employment is anticipated to grow at a 0.9 of a percentage point rate. The New York area is one of the wealthiest in the region, with an estimated per capita income of $55,320 in Manhattan, more than double the national average. Personal income growth in the region will average between 5.5 percent and 6 percent over the next three years.
The healthy economy has been reflected in the office market, as the overall vacancy rate fell from 13.9 percent to 10.9 percent in one year's time. The vacancy rate for Class A space fell to the single digits and currently stands at 8.5 percent. With the exception of the Westchester market, all major markets experienced single digit Class A vacancy rates at the close of the year. During 1996 and 1997, the total amount of available prime space has dropped by more than 35 percent.
The lack of quality space has resulted in new construction. Some 3.9 million square feet of projects are currently under construction, with a 73 percent pre-leasing rate. As quality space becomes more scarce, several proposed developments are expected to move forward across the area.
Downtown Manhattan witnessed substantial improvement, with a 5.2 percentage point decline in the vacancy rate and a net absorption rate of all major markets at 3.6 million square feet. Leasing activity increased by an alarming 58 percent, with just under 9 million square feet of transactions completed. Corporate consolidations and expansions are fueling the growth. While consolidations and mergers leave vacant space behind in other properties, quality space will be absorbed quickly, while investors eye secondary and tertiary properties for potential conversion or rehabilitation.
The New Jersey office market experienced another strong year, with vacancy rates falling by 3.7 and 3 percentage points in Northern and Central New Jersey, respectively. Absorption for both markets combined totaled 5.7 million square feet, compared to 2.6 million square feet in 1996. Leasing activity totaled 12.9 million square feet, nearly 20 percent higher than last year's level.
With quality space hard to come by, several build-to-suits are currently under construction and some speculative construction is expected to begin within the next several months. he growing service sector, particularly business services and heath-related services, has contributed to the growth.
The Westchester County market also witnessed marked improvement, registering positive net absorption of 882,000 square feet, compared to last year's negative 111,000 square feet. Commitments by large users such as IBM, which will retain its corporate headquarters in Armonk, kept the market on a growth track. However, many small to mid-sized companies are finding it increasingly difficult to find quality space, as landlords with large blocks of space will not consider smaller divisions. While more space is expected to be added to the market due to corporate consolidations and mergers, particularly in the accounting and securities industries, the area remains attractive to investors, who see opportunities to retrofit and reposition vacant properties.
With the regional market tightening even further in 1997, asking rental rates are on the upswing. The overall asking rental rate for all types of space was recorded at $25.34 per square foot at the end of 1997, representing a $1.35 increase since one year ago. As can be expected, the asking rent for Class A space experienced a steeper increase, by nearly $2.50 per square foot, and was recorded at $32.32.
Fairfield County witnessed the greatest increase in asking rentals for prime space, climbing 12 percent to $25.20 per square foot. The tight market, driven by one of the lowest unemployment rates in the country and the ensuing strong demand for office space, has resulted in a landlords' market.
The Class A asking rental rate in Midtown increased by 10 percent and currently stands at $39.29 per square foot. The Class A asking rents in Northern New Jersey climbed to $26.71 per square foot from $24.55 in 1996, while Central New Jersey Class A rental rates rose to $22.49 per square foot from $21.44. The New Jersey waterfront has little available space for lease, with a Class A vacancy rate of 4.1 percent.
What the average asking rental rate numbers do not show is the change in concessions. Across the region, free rent periods are getting shorter and shorter, work allowances are less generous, and negotiating periods are becoming briefer.
The New York area is well-positioned for 1998. Profits on Wall Street continue to soar, having a multiplier effect on the entire region, which leads to more growth in service-related industries and retail trade. Telecommunications, pharmaceuticals and financial services companies are firmly rooted in the area and provide the necessary engine for economic growth. The burgeoning entertainment and multi-media industries find the area attractive for its diverse and rich pool of creative talent.
Despite the higher costs of conducting business relative to the rest of the nation, domestic and foreign firms will continue to locate here because of the area's high concentration of financial and human capital.
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|Title Annotation:||Annual Review and Forecast, section 2; office market|
|Publication:||Real Estate Weekly|
|Date:||Jan 28, 1998|
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