Manhattan Trophy Offices Lose Some Luster

Weakening economic conditions in Manhattan’s office sector have begun impacting average asking rents for the city’s trophy-quality office buildings. According to a recent report from Jones Lang LaSalle, Manhattan’s top-end properties have seen average asking rental rents decline 6.2 percent, falling to $102.84, from $109.61 per square foot in the spring of this year. Rents overall continued to move higher throughout the summer months, even though vacancy rates had risen consistently since the beginning of the year. Midtown’s high-end buildings saw rates fall slightly more than 4.4 percent during the same time period, dropping to $117.46 per square foot from $122.93 per square foot. Downtown trophy buildings reported net decreases of more than 9 percent, slipping to $64.54 per square foot from $70.80 per square foot. The report covers Manhattan’s premier office towers, such as the Citicorp Building, Lever House and the Seagram Building. These buildings are a magnet to many corporations, and typically outperform Class A buildings as a whole, said James Delmonte (pictured), vice president & director of research in the New York office of Jones Lang LaSalle. “These are quality, high-profile buildings that people want to be in,” he said. The report predicts some tough sledding ahead for Manhattan’s Class A office inventory. Overall, rents for Class A space could fall from 25 to 30 percent by the end of 2009, the report says. Using history as a guide, the report forecasts that trophy properties will not endure such a drastic downturn. In 2003, at the bottom of the previous real estate cycle, the Midtown Class A vacancy rate reached 9.5 percent, while Midtown trophy product held at 7.3 percent. They also rebounded faster. From 2003 to 2007, while Midtown Class A rents increased 69 percent, Midtown trophy properties saw rents climb by 82 percent. The report predicts that if the employment picture starts to improve by 2010, as some economists forecast, real increases in asking rents may not occur until 2011, since real estate is a lagging indicator. But since Manhattan is such a supply-constrained market, and with many office development projects put on hold, modest employment gains over the next decade should push vacancy lower and rents higher, with trophy properties garnering the most benefit. [Trophy properties’] performance doesn’t fall off as sharply [during a downturn], and they come back faster,” Delmonte said. One metric Delmonte said he will be watching in the overall Manhattan office market is the level of sublease space that will become available. At the depths of Manhattan’s last downturn earlier this decade, about 45 percent of available space was sublease, he said. “We don’t know if it will reach that high again.”