Rents rising as eager tenants face limited supply.
Space in Midtown's top buildings is virtually impossible to locate, but when tenants are lucky enough to find it, deals are being signed at rents as high as $70 per square foot.
The limited supply and high rents of Class A space has caused smaller space users who require a Manhattan presence to consider Class B and Class C space. As a result, owners of Class B space are upgrading their buildings at a swift pace, and the number of renovation projects are expected to increase. The overall vacancy rate of 5.3 percent is poised to tighten even further as this space is absorbed by eager tenants.
In excess of two million square feet of Class C space is in the pipeline to be upgraded over the next 12 months. Rents will increase commensurately from the teens to the mid-twenties, and limited concession packages will become available. While this spate of renovation will increase the supply of quality office space, it is not expected to have much impact on the overall availability in the Midtown market. However, the newly expanded volume of Class B space will provide options for space users looking in the tight Class A market.
All submarkets in Midtown Manhattan recorded lower Class B vacancy rates for the third quarter. The overall Class B vacancy rate for the third quarter was 5.2 percent, compared with 9.1 percent at this time last year.
Leasing activity remained strong throughout the third quarter, buoyed by the transactions for Class B space. Overall, 7.59 million square feet of space was leased in the Midtown market in the third quarter. This brought the total space leased in Midtown New York in 1998 to 22.9 million square feet, an increase of more than 4.5 million square feet over the first three quarters of 1997.
Activity in the Plaza I submarket more than doubled from 284,862 square feet in the second quarter to 603,801 square feet in the third quarter. The West Side I submarket also saw considerable activity, with 1.35 million square feet of space leased in the third quarter, an increase of 433,058 square feet over the second quarter. Class A leasing activity increased in the West Side I submarket, while all other submarkets showed a slight decrease of activity in this category.
For yet another quarter, the average rental rate offered rose in all categories tracked. The overall rate was $32.76 per square foot in Midtown for the third quarter, an increase of $2.38 from the second quarter 1998, and an increase of nearly $5 over the same period last year. The average rental rate offered for Class A space increased by $3.23 to reach $49.01 per square foot, while the average rental rate offered for Class B space rose $2.24 to $39.67 per square foot.
The highest average rental rate offered was in the Plaza II submarket, where building owners asked an average of $56.01 per square foot. Class B space fetched an average of $42.08 per square foot in this same submarket.
Major transactions in Midtown include Time Warner, Inc.'s commitment for 752,000 square feet at the New York Coliseum site; a 416,142 square-foot lease for Debevoise & Plimpton at 919 Third Avenue; Times, 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.
While the real estate market remains robust in New York, building owners and space users :are speculating on how the troubled global financial markets will affect them. Many are watching for a possible flattening of rents and increased availability as companies alter their growth strategies.
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|Title Annotation:||Third Quarter Review; office building rents in Manhattan, New York, New York|
|Publication:||Real Estate Weekly|
|Date:||Oct 7, 1998|
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