By Peter Shakalis

The amount of available office space dropped from 13.8 percent at the end of the fourth quarter of 2009 to13.6 percent (a total of 9 million square feet or three times the amount of space in the Empire State building) by the end of the first quarter of 2010. The total amount of office space in Manhattan is 450 million square feet.

While the average asking rent did decline by 0.5 percent from the fourth quarter of 2009 to the first quarter of 2010, with the exception of the downtown market, the average asking rent actually increased slightly in the Midtown and Midtown South markets. This change in direction indicates either simple hubris on the part of landlords, or their response to an actual tightening up of available space in the face of continued demand by tenants. Our research indicates that the market’s supply/demand balance has improved in some sectors of the Manhattan office market.

Additionally many in the real estate community believe that an excess of sublease space is the critical element in keeping downward pressure on rental rates. Sub-landlords are more interested in reducing the net cost associated with office space that is not being used, even though this predicament is often a relatively short term issue. (The majority sublease space available from tenants has 1 to 4 years left on the term) Property owners, on the other hand, may well be thinking about pricing in terms of maximizing returns over a long term basis. Hence they might be less willing to lower their asking rents to capture a deal in a momentarily depressed market.

Overall, Manhattan had a small but significant decline of 2.6 percent from the fourth quarter to the end of the first quarter of 2010 in the amount of sublease space available for lease. Hence, a continued decline in this segment of the market may be a positive indicator of things to come.

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Peter Shakalis is a Director at
FirstService Williams Real Estate
pshakalis@fswre.com