Rents on Manhattan office space rose to $71.35 per sq. ft. as of midyear, compared with $63.47 per sq. ft. last June, despite financial services job losses of roughly 20,000, which have stifled demand and returned approximately 1.5 million sq. ft. of office space over the past year. The sector is a major employer and driver of office space demand in the New York market.

“Despite a soft economy and struggling financial sector, the Manhattan office market continues to be resilient as second-quarter absorption and leasing showed improvement over the first quarter, and relocation transactions combined with renewal activity has been close to 2007’s levels,” said Howard Fiddle, vice chairman of CB Richard Ellis, during a second-quarter media briefing this week on the New York office market at the company’s offices in the MetLife Building.

In June, Manhattan leasing activity rose to 2.2 million sq. ft., up from 1.69 million sq. ft. in May. In the first half of the year, however, leasing activity was down to 10.4 million sq. ft. compared with 11.98 million sq. ft. at the end of June 2007. The average vacancy rate stood at 6% at the end of June, compared with 4.4% over the same period last year.

David Maurer-Hollaender, a CBRE vice chairman, noted that companies are not in a hurry to get rid of their space, and CBRE has not seen a “vast flood of subleased space hitting the market.” In short, firms are not relinquishing space in direct proportion to the layoffs, Maurer-Hollaender said.

Fiddle noted a “significant widening” of the pricing for direct rentals and for subleased space, with subleased space driving rents down since renters of subleased space are motivated more by a desire to “stop the bleeding” than by the desire to wait and maximize value that motivates landlords of directly leased space. Fiddle expects this widening to continue.
 
Fiddle said that this “counterintuitive” rise in rent in the face of a slowdown and job losses in the financial services sector is due to the essentially supply constrained nature of the market.
 
“With new construction constrained and sublease space still modest today, landlords have never been in a stronger position heading into a market downturn,” according to Maurer-Hollaender. While tenants are in a better position to garner concessions from landlords, it is only a “very modest increase” in terms of concessions granted in the form of rent abatements and tenant improvements.

Even if the economy continues to worsen and more space is added, it is unlikely to be at a level that would lead to a freefall, according to CBRE, which means the lack of choice for tenants will still limit the downside.