Six years after the 9-11 attacks, tenants are flocking to lower Manhattan’s office market in droves. This morning, Manhattan-based real estate services firm Cushman & Wakefield held its quarterly briefing on the Manhattan market. One central finding from the briefing was that downtown office vacancy hit 6.7% at the end of June, down from 11.2% just 12 months earlier.
The 450 basis point drop in vacancy was driven by a 68% increase in downtown leasing activity during the first six months of 2007. That leasing wave absorbed a staggering 2.2 million sq. ft. of office space in the district, or slightly less than 400,000 sq. ft. per month. The vacancy decline was also achieved during a period that added the 1.7 million sq. ft. 7 World Trade Center project to the downtown inventory.
“This is one of the largest declines in vacancy that we’ve recorded in recent history,” says Joseph Harbert, chief operating officer of the New York Metro Region at Cushman & Wakefield.
Midtown Manhattan’s record rents are one factor that’s driving tenants downtown. Average asking rents on Park Avenue in the heart of midtown surpassed $100 per sq. ft. at the end of June. Meanwhile the average asking rent in midtown was $69.08 per sq. ft., up from $50.35 per sq. ft. since midyear 2006.
The spread between downtown and midtown rents remains wide, too. The average asking rent for downtown office space was just $44.48 at midyear. Overall asking rents for the entire midtown market increased by 36% between the end of June 2006 and 2007, too.
“Some tenants are being priced out of midtown, and are unable to find adequate space in midtown south,” says Harbert. “But we’re also seeing tenants from a diverse range of industries that genuinely want to operate downtown. They’re aware of the positive momentum, and they’re looking forward to becoming part of a revitalized community there.”
Through the first six months of this year, average Class-A asking rents in lower Manhattan jumped by $15 to hit $50 per sq. ft., up from $35 per sq. ft. at midyear 2006.
Midtown vacancy declined by just 1.6% and registered 5.3% at the end of June. Harbert equates this smaller vacancy decline to a lack of available space in the midtown market.
While the tight midtown market has forced many potential tenants into lower Manhattan, the entire market continues to lure hordes of investors aiming to buy office properties. The Manhattan investment sales market closed the first half of this year with $34.1 billion in sales, up more than 83% from the $18.5 billion that sold through midyear 2006. Those totals also include properties under contract at the end of each period.
“We ended 2006 with a record-breaking $34.7 billion in sales closed,” says Harbert. “It’s safe to say we’re on pace to break that record.”
Rising interest rates and tighter lending standards shouldn’t put a damper on sales activity. Harbert cites four trends that should fuel sustained demand for Manhattan office buildings in coming months: “With Class-A rents exceeding $100 per sq. ft. in many buildings, extremely low vacancy rates, limited new and an abundance of investment capital targeting New York, we don’t anticipate any significant impact this year.”