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Midtown Office Vacancies Hit 14-year Low

Downtown rents highest in 11 years

By Carter B. Horsley

Vacancies in the Midtown Manhattan office market reached a 14-year low of 6.1 percent in 1999 as total leasing activity hit 16 million square feet, about 10 percent off the level of the previous two years, according to a year-end report released in March, 2000 by Insignia/ESG (http://www.insigniaesg.com).

The vacancy level the previous year was 8.1 percent.

"Net absorption of Midtown office space jumped 60 percent between 1998 and 1999. After four straight years of positive net absorption, tenants, simply aren’t giving space back to replenish the city’s available office stock. And except for some near fully pre-leased projects in Times Square, as well as the new Bear Stearns building rising on Madison Avenue, developers have not created any new stock," the report maintained.

Park Avenue remained midtown’s tightest submarket with an availability rate of just 3.3 percent and its average rent was $58.62 a square foot a year at the end of 1999, although it set a decade -high average rent of $60.15 in November.

"Indicative of the hot leasing market in an around Times Square, the West Side saw its availability rate drop to 5.1 percent from 5.8 percent despite a nearly 20 percent increase in total inventory," the report said.

Contiguous-block availabilities of 100,000 to 250,000 sq. ft. declined to 10 from 18 the previous year, the report found.

"Looking ahead, the most likely area for new development in Midtown is the Eighth Avenue corridor heading north from Times Square. The city has been contemplating the transfer of approximately 2.6 million sq. ft. in air rights from various theaters in and around Times Square. Those air rights likely will be made to sites along Eighth Avenue, Seventh Avenue and Broadway between 42nd and 56th Streets," it continued.

The study reported 206.3 million square feet of space in 362 buildings in 8 subdistricts. The highest asking rents at the end of 1999 was the Fifth/Madison subdistrict that was $59.48 and the lowest was the Penn/Garment subdistrict that was $31.93. Average asking rents for the other subdistricts were as follows: West Side, $47.45; Sixth/Rock Center, $52.42; East Side, $50.33; Grand Central, $45.97; and Murray Hill, $35.89.

"The resurgent financial services industry, couple with the explosive growth of high-tech and dot-com companies, left the Downtown office market in near perfect supply/demand equilibrium at year’s end for the first time since 1985. Available supply fell more than three percentage points to 9.1 percent of total inventory…and average asking rents spiked 6 percent to $33.61 per sq. ft. - their highest level in 11 years," the report found.

The company states that there are 97.1 million sq. ft. of office space in 132 buildings in three submarkets Downtown. The average asking rent in the World Trade Center/World Financial Center subdistrict at the end of 1999 was $39.97, while the Financial subdistrict had a similar rate of $33.40 and the City Hall/Insurance subdistrict had one of $31.36.

"A market that was awash in available space only five years ago when its overall availability rate peaked at more than 25 percent, Downtown Manhattan today is in danger of not being able to keep up with that demand. The market continues to be the beneficiary of tight conditions in Midtown and Midtown South, where large and even mid-size space users have few if any viable options for expansion….With continued recycling of older buildings into modern office stock and residential uses, the enduring strength of Wall Street and the emergence of new high-tech industries, the near-term future points toward shrinking availability and increased rental rates in the Downtown market," the report said.

"An influx of new high-tech tenants with a preference for older office space resulted in Secondary Pre-War buildings leading the market in terms of leasing activity in 1999. Secondary Pre-Wars accounted for more than 2 million sq. ft. or 30 percent of the Downtown market’s total volume," it said.

"The explosive growth of Internet and telecom companies in Midtown South continued in 1999, accounting for some 30 percent of the market’s 3 million sq. ft. of total leasing activity. Available supply was reduced by 18 percent to just 1.9 million sq. ft. for a year-end availability rate of 4.5 percent based on 410,000 sq. ft. of positive absorption. Midtown South’s average asking rent rose 15 percent for the year to $35.18 per square foot, setting a new record for that market," the report found.

The report maintains that there are 41.9 million sq. ft. of office space in 119 buildings in five subdistricts of Midtown South: Chelsea, Flatiron, Park Avenue South/Madison Square, NoHo/SoHo and Hudson Square/TriBeCa. The average asking rent for all five subdistricts ranged between $32.02 for NoHo/SoHo to $36.56 for the Flatiron District.

One could argue that the NoHo/SoHo and Hudson Square/TriBeCa subdistricts of Midtown South should be moved into the report’s Downtown market section, based on geography and building type.

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