Like most office markets, Manhattan’s has been characterized recently by the seesawing dynamic between vacancies and rents: As rents have fallen, vacancies have climbed.
Amid the gloom, however, some positive signs have emerged: law firms continue to lease space unlike their sluggish FIRE sector counterparts who are holding back on any major expansion plans. And fewer tenants are throwing vast chunks of space back onto the market, at least for now.
Law firm O’Melveny & Myers LLP, for example, leased over 270,000 sq. ft. of office space at 7 Times Square. The next largest leasing deal in 2002 was signed by law firm Pillsbury Winthrop LLP for 180,000 sq. ft. at 1540 Broadway.
Why are law firms driving Manhattan’s leasing market? For one thing, the weak economy has turned bankruptcy law into a growth industry. And the barrage of corporate scandals that have come about in recent months have also helped generate billable hours for city attorneys. "The law firms are really leading the way here. They all feel that now is the time to explore the opportunity of moving into new space," says Lewis Miller, executive managing director at Insignia/ESG.
Another obvious factor is fueling Manhattan’s legal expansion — rock bottom rents for prime office space. Midtown’s availability rate climbed to 13.2% at the end of the first quarter, reports brokerage Newmark & Co. — the highest midtown’s vacancy has been since year-end 1995. At 17%, yhe availability rate downtown was slightly higher at the close of the first quarter, with sublease vacancy rising to 5.6% from 5.3% at the close of 2002.
Discounts on direct space are running as high as 10% in midtown, reports Grubb & Ellis. Then there’s the sublease space which can be secured for up to 40% less than year 2000 direct rents.
On the sublease side of the equation, more than 552,000 sq. ft. of office space was returned to the midtown market during the first quarter, reports Newmark. But 262,000 sq. ft. of sublease space was removed from the midtown market then, which makes it the first quarter in two and a half years that the sublease market has posted positive absorption.
"As long as there is no more significant dumping of space, we are confident that midtown will hold. So far this year we are starting to see more renewals and new commitments from tenants," says Mary Anne Tighe, tri-state president at CB Richard Ellis.