A mysterious gas-like odor may have circulated through Manhattan yesterday, but two new reports offer solid evidence that the city’s office and hotel markets are hardly running on fumes. The back-to-back reports, both unveiled within the past 24 hours, confirm that Manhattan’s office and hotel markets posted dazzling performances in 2006.
Not only did office rents come eerily close to breaking the previous record set in 2000, but Manhattan hoteliers shattered the $200 revenue per available room (or RevPAR) barrier that was also set six years ago. The lodging report was released yesterday by Manhattan-based advisory firm Hotel Investment Strategies LLC. Earlier this morning, Manhattan office brokerage Cushman & Wakefield presented its year-end 2006 office stats.
“A decline in available space has propelled us to near-record rental growth,” says Joseph Harbert, chief operating officer for Cushman & Wakefield’s metro-New York region. “It would not surprise me if we exceed the all-time high by the end of the first quarter [2007].”
By the close of December, Manhattan asking rents rose to $50.56 per sq. ft., up nearly 25% from $40.58 at the end of 2005. Manhattan asking rents peaked at $50.92 per sq. ft. at the end of 2000. Expensive leases were responsible for much of the rental growth last year.
Cushman reports that a total of 41 leases were signed with rents above $100 per sq. ft., and that represented a 300% jump over the 2005 total. What’s more, the number of office buildings commanding over $100 per sq. ft. rents jumped from five in 2005 to 21 by the end of last year.
Vacancy continued to fall during the course of 2006, too. Manhattan’s overall vacancy rate fell to 6.7% by the end of December, down from 8.4% just 12 months earlier.
To Harbert of Cushman & Wakefield, these numbers illustrate how expensive it has become to operate a business in space-starved Manhattan. But Harbert adds that the same figures prove that more businesses are willing and able to pay Manhattan’s soaring occupancy costs.
Ditto for business and leisure travelers. According to an analysis by Hotel Investment Strategies, Manhattan hoteliers boosted room rates aggressively during the past two years. But few rooms went begging, and hotel owners enjoyed RevPAR growth rates of 18.1% and 11.2% in 2005 and 2006 respectively.
“The Manhattan lodging industry is about to embark on one of its most profitable periods in recorded history,” says Ross Woods, principal of Hotel Investment Strategies, who authored the analysis.
Average hotel occupancy in Manhattan closed 2006 at 85.5%, up from 85% at the end of 2005. Room demand has exceeded the supply of rooms, too, forcing many owners to turn away guests.
While this suggests that occupancies have hit a ceiling, Woods believes that even higher occupancies can be achieved over the next year. “This will be accomplished by achieving greater occupancies in the quieter periods — trough and shoulder months and weekends,” says Woods.
One barrier that remains unbroken is the average daily rate (ADR). Woods says that Manhattan’s ADR has grown significantly at the average annual rate of 12.3% since 2003, but it has yet to eclipse the peak 2000 ADR rate of $222.56 in real terms. But worry not. Woods doesn’t expect that record to hold, either. “[Manhattan ADR] is set to do this in 2007.”