Cushman: Landlord's Market Approaches as Manhattan Office Vacancy Falls to 9%

Despite a lull in first-quarter leasing volume, Manhattan’s tightening office market is on track to give landlords the upper hand in the near future, according to projections released yesterday by Cushman & Wakefield Inc.

By Paul Rosta, Senior Editor

Image courtesy Flickr user Mario Carvajal

Despite a lull in first-quarter leasing volume, Manhattan’s tightening office market is on track to give landlords the upper hand in the near future, according to projections released yesterday by Cushman & Wakefield Inc.

Among other trends, Manhattan boasts the nation’s lowest vacancy rate at 9.1 percent, and the Midtown South submarket ‘s 4.9 vacancy rate makes it the tightest of any central business district in the country. Manhattan’s overall vacancy could slip to 8.5 percent or lower by the end of the year, Cushman & Wakefield projects. “You’re looking at a market that’s heading more toward a landlord’s market than a tenant’s market,” said Joseph Harbert, chief operating officer for the firm’s New York City metropolitan region.

Office rental rates are up 7.7 percent year-over-year across the board to about $59 per square foot, although the degree of the increase varies widely among Manhattan’s three submarkets: Midtown (6.5 percent), Midtown South (10.5 percent) and Downtown (2.4 percent). Media and technology firms continue to emerge as a new force, accounting for 42.4 percent of Downtown leases and 27 percent of Midtown South leases during the first quarter.

Class A rents in Midtown continue their slow improvement and have inched up 10 percent since their trough in the first quarter of 2010. Noting a trend that he termed “unprecedented,” Harbert reported that rents in Midtown South’s 14.4 million-square-foot Class A inventory reached $67.52 during the first quarter—only $4.56 behind rents in Midtown’s 181 million-square-foot Class A market.

Higher pricing and declining vacancy rates helped to offset leasing activity that has slowed considerably since last year’s 30 million-square-foot record. During the first quarter, leasing totaled 5.8 million square feet, a 24 percent decline compared to the first quarter of 2011. A smaller number of big-block leases than a year ago did much to keep the lid on volume.

Yet in another intriguing trend, transactions in the 10,000-square-foot to 25,000-square-foot range made up about one-third of leasing volume in the first quarter. A year ago, that category had only a 21 percent share of leasing volume. Such robust activity from smaller users points to healthy growth in the future as those entrepreneurial firms expand. “I think it’s an encouraging sign for the marketplace,” Harbert said.

Behind the largely positive snapshot of the office market are economic fundamentals that are outpacing the rest of the country.  “New York City is one of only three cities in the country where employment is higher than it was before the recession,” said Ken McCarthy, senior economist & senior managing director. Joining Washington, D.C., and Houston in an exclusive club, New York City has gained back 120 percent of its pre-recession jobs.  The city added 28,000 jobs in the first quarter to go along with the 72,000 gained in 2012.