What Every Tenant Needs to Know About the Real Estate Market

April 17, 2007 by jack petrie.

1st Quarter 2007 Market Report 

Tenant’s Viewpoint

Overall occupancy costs will continue to rise due to increasing rents, higher construction costs and space remeasurement by landlords (to create higher “loss factors”).  Regarding construction, most available space will be delivered demolished and will require complete renovation, while landlords are providing smaller tenant improvement allowances and less base building work.  These factors result in relocations becoming more expensive, necessitating increased time for budgeting and planning when determining whether a relocation or renewal is the best alternative.  It is critical for tenants to understand the speed at which current transactions are expected to close, once negotiations begin.  Landlords will not hesitate to retract the issuance of draft leases, once any sign of hesitation or improved market economics emerges.

Market Overview

The city’s economy continues to fuel strong demand for office space.  Since January of last year, job growth in the private sector alone has grown by 2%, creating over 60,000 new jobs.  This job growth has had a dramatic effect on vacancy rates and consequently, rental rates, which in the overall Class A market increased by 26.9% over last year.  In turn, rental rates in formerly good value submarkets such as Midtown South and Downtown have risen sharply, as well.  Downtown asking rental rates are now comparable to Midtown Class B rates.  The scarcity of space and higher rental rates have created a ripe environment for new speculative development for the first time since the late 1980’s and early 1990’s.

Trends & Statistics

Midtown
In the first quarter of 2007, average office rents rose $3.95/rsf (5.9%) to $71.40/rsf for Class A space.  This is an historical high figure.  The asking price for Class B space saw an increase of $1.67/rsf (3.9%) to $44.44/rsf.  Vacancy rates continued to drop decreasing by 0.6% from 5.2% to 4.6% within Class A space and remained stable in Class B space at 4%.  Class A net absorption was 1,170,437 rsf and Class B net absorption was 34,822 rsf for Q1 ‘07.

Midtown South
Average asking rents rose substantially by $2.15/rsf (5.4%) from $40.05/rsf to $42.20/rsf.  Net absorption was 224,484 rsf for Class A&B space combined.  Vacancy rates remained stable at 5%.

Downtown
Downtown Class A space rose by $1.54/rsf from $45.27/rsf to $46.81/rsf, while Class B space experienced an increase of $3.59/rsf (9.9%) from $36.38/rsf to $39.97/rsf.  Total net absorption was 1,452,878 rsf and (-16,605) rsf for Class A and Class B space, respectively.  This was the first negative absorption of Downtown Class B space since 2005.  Class A vacancy rates dropped 20.4% from 10.3% to 8.2%, while Class B vacancy rates remained steady at 10.0%.

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