By Peter Shakalis

As in recent previous quarters, the trend for availability to decline in the Midtown markets and to increase in the Downtown market continued. Nevertheless it appears that the New York City economy and particularly Manhattan’s is robust enough to result in the positive absorption of office space.

Midtown North rents moved up again in the fourth quarter with the average asking rate at $60.99/sf from $59.95/sf in the third quarter, a 6.9 percent annualized gain. For the Class A buildings in Midtown North, the increase was even larger; equaling an 11.7 percent annualized increase. The availability rate declined again, falling to 12.4 percent from 12.7 percent in the third quarter of 2010 and 14.9 percent in the fourth quarter of 2009. In the newer glass and steel structures built over the last forty years, the availability rate is even lower. Vacancy rate in this market is now down to 7.3 percent, and the average vacancy rate for the first three quarters of 2010 was 7.6 percent. During the rent surge in the 2006 through mid-2008 period, Midtown North’s vacancy rate remained in the area of 5 percent. Given the current economic/business projections for New York City and the likely few additions to the supply of newly constructed space, the Midtown North’s vacancy rate could be back into the 5 percent range by the end of 2012 or early 2013.

For the last several quarters, there have been rent increases in the Midtown South market. This trend continued with average asking rents at $42.15/sf in the fourth quarter, up from $41.91/sf in the third quarter. The availability rate declined in the fourth quarter to 10.1 percent from 11.1 percent in the third quarter of 2010. In the fourth quarter of 2009, availability stood at 11.7 percent. The overall vacancy rate in this market fell to 5.2 percent in the fourth quarter from 5.6 percent in the third quarter of 2010. Empty space in Midtown South’s Class B product is especially tight, with a vacancy rate that is slightly below 5 percent.

The Downtown market however remains in a slump with the average asking rent slipping again. The fourth quarter average was $36.78/sf, 10.5 percent above the previous cycle’s low reached at the end of 2003. One would surmise that with rents at these levels the urge to relocate to Downtown should be strong, however leasing activity in the fourth quarter doesn’t point to that result. The availability rate rose at the end of the fourth quarter to 16.9 percent from the 16.4 percent level in the third quarter of 2010. Nevertheless, as companies move into this market over time taking advantage of it’s pricing, the market should stabilize in 2011 and begin to recover in 2012. This cyclical pattern isn’t much different from that seen in previous recovery periods when Downtown lagged the rebound in the Midtown markets.

It appears that the overall rent cycle has been particularly compressed this time, much faster than the last market downturn and recovery. This may have provided the conviction on the part of landlords to push increases and at the same time the acceptance of those increases by prospective tenants. While the overall steady decline in the availability and vacancy rates account for part of the increase in lease rates, there may also be a general change in sentiment about the prospects for the regional and national economic environments.

Peter Shakalis is a Director at
FirstService Williams Real Estate