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Manhattan's 2010 Third Quarter Roundup...
The Midtown office space market is holding firm, or as firm as can be expected, with rents averaging $54.93 per square foot. In the Midtown North market, the availability rate (the percentage of vacant space and space that is presently under lease, but can be made available to a perspective tenant) reached 12.7 percent by the end of the third quarter of 2010, down from almost 15 percent in the latter half of 2009.

By Peter Shakalis

This is a positive sign as an availability rate of 9 to10 percent generally typifies a good balance in the market between available space and demand. Asking rents in this market have been averaging $59.95 per square foot. The Midtown South market also sustained a good performance with an availability rate of 11.1 percent in the third quarter of 2010. The average asking rent has been increasing in the Midtown South market since the spring of 2010, rising at a 5.8 percent annual rate during the first three quarters of 2010 to $41.91 per square foot. Positive trends in the Midtown North and Midtown South markets however have been muted by the deterioration in the Downtown market, which continues to struggle in 2010. The availability rate reached 16.4 percent in the third quarter, up from 11.5 percent one year ago, and is unlikely to improve in the months ahead. Rents have slipped to $37.01 per square foot even though there have been some additions of new state-of-the-art buildings to the inventory of available space that have higher asking rents.

One of the two main reasons for the decline in the Downtown market is that it’s the only market with significant additions of new space over the last few years and has the solid prospect of more new supply during the next three to four years as the World Trade Center buildings come onto the market. This contrasts the Midtown South market which has had no new structures added to its inventory, and the Midtown North market which has seen a slight increase of 1.5 percent to its inventory of space during the past two years, and little new space projected to be added during the next three years. The second reason is that the uncertainly of the implementation and effects that the federal financial regulation legislation will bring adds to tenant hesitation in signing long term lease commitments. The major financial institutions, particularly the banks, have been holding their employment levels relatively steady. The imposition of the new financial regulation law raises the possibility that commercial banks in particular will contract in size and be forced to leave some lines of business. As a result their employment levels might decline, lowering their respective space requirements.

The prospect of this shift in fortunes for these institutions has impeded the recovery in Downtown’s office market. By contrast, solid demands from media, government, fashion, non-profits, entertainment and boutique financial services have sustained the Midtown North and Midtown South markets. The long term view for Downtown however remains positive. Tenants are being attracted by Downtown’s current space availabilities. Condé Nast’s anticipated relocation from 4 Times Square in Midtown North to One World Trade Center and Merrill’s interest in the same building typify the transformation of the Downtown market to a 24/7 area encompassing a broad array of business sectors. Daily News’ previously announced move to 4 New York Plaza provides another example of these opportunistic moves..

Capital Markets:

The capital markets continue to mend. Eighteen office investment sales transactions have closed so far in 2010, resulting in a transactional volume of $3.5 billion. Additionally there are seven properties under contract and seven properties on the market indicating that 2010 transactional volume will almost surely more than double the $1.9 billion total in 2009. The average Class A sales price year-to-date in 2010 is $522.00 per square foot. This pricing level for Midtown buildings represents a significant increase from the $404 per square foot Midtown average for 2009.

While financing is becoming more available, lenders are still being selective and offering much lower loan-to value ratios than were seen at the height of the market in 2006 and 2007. Special services and portfolio lenders are likely to see an increasing number of mortgage defaults. Many large loans that were financed at the height of the market will come due during the next two years, and no deep source of refinancing these loans has emerged.


Peter Shakalis is a Director at
FirstService Williams Real Estate

©2010 NEOCORP MEDIA









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