Leasing volume in Manhattan rose by nearly 2 million sq. ft. over 2001 levels, according to a new report from Cushman & Wakefield. A total of 20.8 million sq. ft. of office space was leased in 2002, up from 18.9 million sq. ft. in 2001. The report showed that overall office vacancy in Manhattan was 12% at year-end 2002. While that represents a 3% increase from 2001 levels, Cushman & Wakefield found that vacancies slowed considerably between the third and fourth quarter of 2002.

"The Manhattan vacancy rate is well below the national average and a relatively stable fourth quarter lends credibility to a positive outlook at the start of 2003," says Bruce Mosler, president of U.S operations at Cushman & Wakefield.

Average CBD office vacancy nationwide now stands at 14.8%. The report projects that leasing volume in Manhattan will continue to increase in 2003. Midtown, however, will be challenged by new construction set to be delivered this year. The three largest projects are the Times Square Tower, 300 Madison Avenue and the AOL/Time Warner Center under construction at Columbus Circle.

"Midtown South and Downtown should see their vacancy rate decline by the end of 2003," says Ken Krasnow, senior managing director and head of Cushman & Wakefield’s New York office. According to Krasnow, any improvements in occupancy will hinge on job growth and the sublease market.

"Subleases are competing with direct space and space is starting to be filled. But if the market experiences any more major space additions due to corporate downsizing, we’ll be looking at higher vacancies by the end of this year," he says.

The report cites a glut of so-called "shadow" space in New York City as an in indication that as much as 5 million sq. ft. of added space could come onto the market at anytime. At the height of the real estate market in 2000, many firms bulked up on space in anticipation of expanding staffing levels. But the recession quickly changed such plans, sending millions of square feet of space back onto the market.

One bright spot in the New York real estate market last year was investment sales. With the availability of cheap capital and the opportunity for stable yields, many investors bet heavily on real estate over riskier alternatives like the stock market. The demand to buy well-leased, trophy assets culminated in Boston Properties’ acquisition of 399 Park Avenue last year for $1.06 billion, a record price for a Manhattan office building.