Manhattan office rents continued their upward climb in the first quarter, even as landlords made concessions that sweetened deals, effectively lowering costs for tenants.

A first-quarter report from New York broker GVA Williams shows that the average asking rent for Manhattan office space rose 24.5% in the first quarter, compared with a year ago, and 5.6% compared with the fourth quarter of 2007.

However, in the first quarter of 2008, some landlords allowed free rent for up to a year, and $25 to $50 per sq. ft. of tenant improvements. That means that effectively Manhattan rents were up just 24.3%. For the first quarter of 2007, such concessions included up to 10 months of free rent and $20 to $45 per sq. ft. of tenant improvements.

First quarter leasing volume was down 2.8%, according to GVA Williams.
Manhattan office vacancy rates climbed .09% in the first quarter from the previous year, and .07% from the fourth quarter of 2007. GVA Williams attributes the rise in availability to existing space being put back on the market.

“The increase in the number of large blocks of space in Manhattan is good news for the city’s tenants,” says Mark Jaccom, president of GVA Williams. “With a better balance between owners and tenants, we have probably reached a peak in rental rates. Over the next few quarters, landlords will become more flexible and will offer more aggressive concessions.”

New York’s economy is closely tied to the state of the financial services sector, and recent job cuts in that sector have left a mark. Indeed, Challenger Gray & Christmas, a Chicago-based consulting company, estimates that as of mid-April there were more than 36,000 job cuts in the financial services sector. Many high-profile firms such as Bear Stearns, Citigroup and Merrill Lynch have all made large job cuts.

Robert L. Freedman, CEO of GVA Williams, says that while financial services firms have been revisiting their space needs, this is not yet reflected in the office market data. He attributes tenant caution to their experience in the recent 2001 downturn when many firms put space back on the market. When the economy rebounded, the same companies had to buy the space back at premiums of more than 50%. Freedman sees this effect as a “stealth mitigant” for the Manhattan office market.

In a worst-case scenario, GVA Williams expects that the current vacancy rate sof 8.4% would rise to only 9.7%.

Asking rents were up 6.8% for the first quarter in the Midtown South submarket compared with the previous quarter, and up 40.8% from a year earlier. Midtown North saw asking rents rise 4.9% for the quarter and gain 22% from the same period a year earlier. Downtown saw the slowest rate of growth, a 3% gain from the previous quarter and a 15.4% increase from the first quarter of 2007.

“Even though occupancy rates and leasing activity declined during the last three months, asking rents are showing continued strength, albeit at a slower growth rate than in the recent past,” Freedman notes.

Freedman’s outlook is encouraging. He expects that even if asking rents begin to fall, considering that there is very little office construction in the works, the asking rents “will not fall sharply and are likely to rebound within a year to 18 months.”