Emboldened by deep-pocketed finance and legal firms bent on expansion plans, Manhattan landlords pushed office rents into the stratosphere during the first quarter. It was tough to ignore this conclusion earlier today when Cushman & Wakefield released its first quarter market data at a packed restaurant in midtown Manhattan.
Among the findings: Average asking rents for Manhattan office space set a new record during the first quarter when they achieved $53.43 per sq. ft.
All three Manhattan submarkets — which includes midtown, midtown south and downtown — posted positive rent increases. But the midtown Class-A office market took top honors with $70.77 per sq. ft. average asking rents by the end of March, up from $55.30 per sq. ft. at the end of March 2006.
“The trend for office using employment growth in Manhattan is solidly upward,” said Kenneth McCarthy, managing director of Manhattan-based Cushman & Wakefield’s New York metropolitan region research during the company’s quarterly market update earlier today.
McCarthy said that the positive office-using job growth wave took hold in 2004. He expects the positive trend to continue through the end of 2007 as financial and legal services firms continue to expand in the market.
Backing up his claim, McCarthy presented historical data that charted the past 57 years of monthly Manhattan job growth. He concluded that Manhattan typically has “very long economic expansions.” Between the mid 1970s and late 1980s, monthly employment in New York largely increased.
When the monthly job growth turned negative in the late 1980s, too, the down cycle only lasted a few years before heading upwards again in the mid-1990s. New York also sustained a very brief jobs downturn during the most recent recession, which lasted just two years.
This is mixed news for Manhattan tenants who are shelling out vast sums for their office space. Manhattan’s low vacancy rate of 5.7% at the end of the first quarter is also well below what market analysts refer to as “equilibrium,” the rate above which tenants have the upper hand over landlords. It also represents the first time that Manhattan office vacancy has dipped below 6% in six years.
Joseph Harbert, chief operating officer of Cushman & Wakefield’s metro New York region, believes that Manhattan office rents still have room to grow. While Harbert stopped short of projecting percentage increases, he noted that a shallow pipeline of new supply combined with a vibrant job market bodes well for landlords.
It has also forced many tenants to look south. As rents have soared in both midtown and midtown south, many humbled tenants have increasingly eyed lower Manhattan. During the first quarter, tenants absorbed roughly 1.3 million sq. ft. of lower Manhattan office space.
By comparison, there was only 750,000 sq. ft. of space leased during the year-ago quarter. What’s also encouraging is the broad-based nature of this demand. According to Harbert, many tenants being squeezed out of downtown Class-A buildings are seeking space in lesser quality properties.
“Downtown’s overall vacancy rate is seconds away from falling below equilibrium,” predicted Harbert. Cushman & Wakefield pegs equilibrium as roughly 7% to 9% overall vacancy in the Manhattan office market. By the end of March, Lower Manhattan was just 7.2% vacant, or 4.4% lower than a year ago.
The second quarter is also off to a strong start. Just this morning, lower Manhattan office landlord Larry Silverstein announced two new leasing commitments at Seven World Trade Center. Existing tenant Moody’s Corp. will occupy two additional floors within the 52-story tower; new tenant DRW Commodities has also agreed to lease more than 8,000 sq. ft. on the 34th floor of the building. With these leases, Silverstein has filled roughly two-thirds of the building with tenants less than 12 months after opening the property.
Those two financial services tenants also represent the largest single demand for office space. Roughly 35% of all Manhattan office leases signed during the first quarter were for financial services firms. The legal services sector came in second during the quarter, signing roughly 15% of all leases for office space.
Office investors must also believe that both financial and legal services firms will continue to pay exorbitant rents going forward. How else can you explain that more than $13.6 billion in sales closed during the first quarter, up from just $2.7 billion in the year-ago quarter? Cushman & Wakefield also reports that another $11.9 billion in sales transactions were under contract at the end of last month.
For now, the feverish pace continues. “There’s a shortage of office space in Manhattan,” Harbert said. “And we’re on track to exceed last year’s record $34.7 billion in office sales.”