Manhattan Office Market Feels Squeeze, But Rents Gain: C&W’s Harbert

Manhattan’s office market is beginning to show the strain of the capital markets squeeze and economic slowdown, but supply constraints and low overall vacancy are helping keep asking rents steady, according to Cushman & Wakefield Inc.’s quarterly analysis. “Leasing activity is down, but it’s not substantially down,” confirmed Joseph Harbert, COO for Cushman & Wakefield’s New York City metropolitan region, during a briefing this morning. Harbert disclosed that 5 million square feet of office space was leased during the first quarter, an 8 percent dip from the first quarter of 2008. Vacancy inched up from 5.7 percent at the end of last year to 6.1 percent.  The Manhattan office market tallied about 1.8 million square feet of negative absorption overall. Downtown, the home of many financial services firms, returned more than 1 million square feet to the market. Midtown, the largest office submarket, recorded about 726,000 square feet of negative absorption. However, Harbert noted, “We haven’t seen any wholesale dumping of space on the market, which is what people are concerned about.”  In a sign of the times, advertising firms emerged as the new front-runner in leasing activity, taking down 15.8 percent of new leasing activity. The troubled banking and financial services sector–Manhattan’s traditional office leasing leader–is starting to feel the pinch of the financial markets turmoil. Those firms took 15.3 percent of new leases, a drop from the 30.7 percent share only one quarter ago. “I think we’re absolutely going to have to face the reality that we’re going to see some sublease space, we’re going to see some (space) givebacks–and that’s OK,” commented Cushman & Wakefield CEO Bruce Mosler. He explained that changing market conditions would create new opportunities for tenants that have been squeezed in Manhattan’s tight market for the past several years.  Mosler added that Manhattan continues to offer room for rent growth. Office asking rents continued to rise through the first quarter, though a much slower pace than the go-go days of early 2007. Rents for all classes of buildings have jumped nearly $14 per square foot since the first quarter of 2007. Since the end of last year, average asking rents have increased about $2 per square foot, to $67.23. Midtown continues to command the highest prices, at $78.85 per square foot, followed by Downtown ($50.25) and Midtown South ($48.95). Turning to Manhattan’s investment market, Harbert confirmed that office building sales are much quieter than they were a year ago. During the first quarter of 2007, trades valued at $28 billion closed or came under contract. In stark contrast, Manhattan investment sales plummeted to only $5.1 billion during the first three months of this year. In a striking development, foreign investors are taking a much higher profile in the Manhattan investment sales market. Forty-five percent of sales closed or placed under contract during the first quarter in Manhattan are for foreign buyers, up from 15 percent a year ago.