By Carter B. Horsley
The Manhattan office market continued to tighten significantly in the first half of 1998 and asking rents soared in many areas, according to the latest reports from Insignia/ESG Office Market Review and Cushman & Wakefield.
"Rental rates, occupancy levels and investment sales prices reached decade peaks during the first half of 1998. A diversity of industries, led by financial services, but also including media, telecommunications, and publishing, is fueling the current market frenzy. Rent spikes and the scarcity of space drove overall direct asking rents to $31.15 per square foot from $27.20 per square foot in mid-1997," the Cushman & Wakefield report stated.
"Private sector employment in the City is on track to a record gain of over 73,000 jobs by the end of 1988," it continued, adding that "total Manhattan leasing posted at a vibrant 17 million square feet for the year to date, up nearly 15 percent from last year's record pace" and tenant improvement and free rent concessions are dropping and long overlooked buildings are leasing.
In the midtown market, which contains about 194.5 million square feet of office space in 361 buildings, the availability rate declined to 8.7 percent as compared to 11.3 percent in July, 1997, according to the Insignia/ESG Office Market Review. Average asking rents increased to $39.83 a square foot a year as compared to $33.86 the previous year, the report maintained, noting that "tenant activity has picked up in non-traditional Midtown office venues such as the West Side and the Penn/Garment segment - both relatively inexpensive submarkets that hold the most promise for availabilities through new construction and renovations."
Average asking rents in the Fifth/Madison district climbed to $52.60 from $44.03 the previous year, while Park Avenue increased slightly to $46.66 from $44.71 and fell behind the high levels of the 6th/Rock Center district whose average asking rent climbed to $48.07 from $39.93 the previous year, the Insignia/ESG report found.
The smaller Midtown South market, which consists of about 40.9 million square feet of office space in 119 buildings had an availability of 5.2 percent in July, 1998, down sharply from 9.5 percent the previous year.
The city's tightest submarket, the same report said, was the Park Avenue South/Madison Square district whose availability rate was "a mere 3" percent." The Midtown South market includes not only the Flatiron and Madison Square areas but also Chelsea, NoHo and the Hudson Square/TriBeCa submarkets. "Despite the market's relative dearth of available space, rental rates have not increased as dramatically as they have in the Midtown and Downtown markets. At midyear, asking rents in Midtown South average $24.60 per sq. ft. - up $3 from a year ago," The Insignia/ESG Office Market Review maintained.
The Downtown market, which consists of about 90.5 million square feet in 133 buildings, was especially hot. "Downtown office-building investors who rolled the dice with bargain-basement buys in the early 1990's today are being heralded as turn-of-the-century sages. In some cases, their investments have appreciated significantly in the face of a highly charged Downtown leasing market," the Insignia/ESG report continued. "Tenants reduced Downtown's available office inventory by 1.5 million sq. ft. in the first half - a 15 percent increase over last year's absorption rate at this time. That demand - powered by a 20 percent increase in leasing activity to 4.2 million sq. ft. - lowered Downtown's overall availability by seven points to 14" percent and the average asking rent rose more than $3 a sq. ft. to an average of $28.92," the Insignia/ESG study concluded.
The Cushman & Wakefield report indicated that "more than 25 percent of New York companies surveyed intend to increase staff in the third quarter" and forecast that in Midtown Class A asking rents will average in the mid-$40s per square foot by year-end and $48 per square foot by late 1999 and that Class A vacancy rate will drop to 6 percent by the end of 1998 and to 5.5 percent by the end of 1999.
Downtown, large lease commitments by Guardian Life Insurance, the New York City Housing Authority, J & H Marsh & McLennan, and the Bank of New York made rental rates soar and vacancy rates plummet. Class A direct space rates jumpted to $36.48 from $30.11 last year, a 21 percent increase, the Cushman & Wakefield report noted, adding that downtown leasing activity was up 45 percent over last year's record-setting pace. "Vacancy rates were down across the board with Class A space leading the descent to an astounding 5.9 percent from 12.2 percent at mid-year 1997," it continued.
Bullish real estate investment trusts and institutional investors spent close to $4 billion in the first half of the year acquiring 37 major Manhattan properties with a total of about 22 million square feet, Cushman & Wakefield reported. "Perhaps the most notable investment, the GM Building, represented the largest sale in terms of overall purchase price. Donald Trump, together with the Indianapolis-based company, Conseco, announced a deal to acquire the 50-story property for $800 million, approximately $489 per square foot. In another major announcement, Paramount Group plans to purchase 543,207 square fet at 712 Fifth Avenue for $576 million," the Cushman & Wakefield study observed.