Manhattan office rents continued to decline in the second quarter of the year, a sign that although vacancy has appeared to stabilize and leasing activity has picked up, the city’s office market is still struggling to emerge from the downturn.
Ken McCarthy, an economist for the real estate services firm Cushman & Wakefield, predicted that average commercial rents in Manhattan would not turn around until 2011, in part due to continued weakness and potential further deterioration downtown.
Cushman & Wakefield gave its appraisal of the market through the first half of the year during a media breakfast this morning.
Even in midtown, which has appeared to recover faster than other office neighborhoods in the city, rents averaged $61.66 per square, 7.7 percent less than where they were a year ago despite a significant pickup in leasing activity. According to C&W’s statistics for the year, almost 8.7 million square feet of midtown space has been leased so far in 2010, more than double what was taken there during the same period in 2009.
In Manhattan overall, about 12.6 million square feet of office space was leased during the first six months, a noticeable increase over the roughly 6.4 million square feet that was leased by tenants during the first half of 2009 when the market was in the doldrums.
Still vacancy rates are either higher than last year or have yet to fall meaningfully even if they have come down noticeably from peaks set earlier this year.
C&W data showed that Manhattan vacancy on average was 10.8 percent at the end of June, lower than the 11.6 percent average in March but 0.3 percent above overall vacancy a year ago.
In midtown, vacancy for Class-A offices, perhaps one of the hardest hit categories of space because of its concentration of investment and banking firms who were impacted by the crisis in the financial sector, rose to as high as 13.9 percent in March but fell to 12.5 percent at the end of June. The vacancy rate for Class-A space in midtown a year ago was only 0.2 percent higher however and the same as it is now on average for Class-A space in all of Manhattan, 11.5 percent.
The data indicates that key market statistics such as supply haven’t fallen enough to drive up rents.
“Right now it’s still very much a tenant’s market and as a tenant looking for space, you have a lot of leverage,” said Franklin Speyer, a C&W leasing executive who attended the breakfast.
But there are signs too that stronger office districts in the city like midtown and midtown south are in the midst of recovery.
The decline in overall vacancy in Manhattan during the second quarter was the first such decrease in three years according to C&W and Manhattan leasing activity in the second quarter was at its highest level since the third quarter of 2006. The bulk of the square footage taken during the year, 8.7 million square feet, has been in midtown, where many tenants have been eager to take prime space at the current discounted rates. In midtown south, 2.3 million square feet has been leased so far in 2010, making it the second most active market in the city.
Absorption, the net amount either taken out of the market if it is leased or added to vacancy, declined in midtown through the first half of the year, albeit only slightly, by 154,000 square feet. In midtown south, nearly 490,000 square feet was removed from the pool of available space.
“Midtown and midtown south have turned the corner,” said Joe Harbert, C&W’s New York area chief operating officer, who predicted that rents would begin to rise in the second half of the year for Class-A space in midtown.
The amount of available Class-A space in midtown has fallen by almost 40,000 square feet this year and by almost 200,000 square feet in midtown south, a market that has a dearth of high end space that has possibly pushed some tenants to take what little of it there is while it is still available.
Lower Manhattan has shown signs of continuing weakness however and C&W executives said that the area’s office market could falter through the year.
“Downtown you can do deals with two years free rents,” said Gus Field, a C&W leasing broker who pointed out the area's favorable leasing conditions for tenants.
During the first half of the year, almost 650,000 square feet of space has been added to supply in lower Manhattan and average rents were $37.81 per square foot, 13.7 percent lower than last year at this time, the biggest decline of any market in Manhattan. 1.6 million square feet of space has been leased so far downtown, which is also the lowest tally of activity in Manhattan.