More Grim News from the Landlord Camp

2nd Quarter 2007 Market Report

Tenant’s Viewpoint

With no indication of weakening in any of Manhattan’s submarkets, landlords continue to maintain their tough negotiation stances. Fewer spaces in good condition are available, thereby increasing tenants’ overall costs via capital costs required to build out space. The gap between Midtown Class A and B asking rents increased from $17.02 per rentable square foot (”rsf”) in the first quarter of 2006 to $28.55/rsf today, indicating continued strong demand for prime buildings. Downtown Class A rents appear to be leveling off (although a $75/rsf asking rent was spotted recently) while Class B asking rents continue to climb. The significant increase in both asking rents and absorption in Midtown South are evidence of tenants searching for more economical space, which is increasingly difficult to find. Tenants need to plan early and be prepared to act when the right opportunity appears, and tenants with significant financial restrictions (such as non-profit entities) may be forced to expand their search to fringe submarkets (Northern Manhattan) or outside of Manhattan entirely (Long Island City, Brooklyn).

Market Overview

The New York City Office market continues to boom with no signs of softening. Midtown South, often considered a value alternative to Midtown, now has the lowest vacancy rate of the three submarkets. Significantly lower absorption throughout Manhattan (1,280,662 rsf, down from 2,867,256 rsf in Q1 2007) suggests fewer relocations and more renewals. The New York City Office of Management and Budget projects that office rental rates per square foot will rise to $93.26/rsf by the year 2011 as compared to today’s overall average of $65.32/rsf. With increasing asking rents and the prospect of any new development being absorbed quickly into the marketplace, there is no relief in sight for the cost conscious tenant.

Trends & Statistics

Midtown
In the second quarter of 2007, Average Class A office rents rose another $3.98/rsf (5.57%) to $75.38/rsf from Q1 2007. The asking price for Class B space increased by $2.39/rsf (5.28%) to $46.83/rsf. Class A vacancy rates remained stable at 4.6%, while Class B vacancy increased marginally from 4.0 to 4.1%. In Q2 2007, Class A net absorption was 48,926 rsf and Class B net absorption was 67,650 rsf.

Midtown South (Class A & B)
Average asking rents rose a staggering 8.25% to $45.68/rsf in Q2 2007. Vacancy in Midtown South dropped from 5% to 3.7%. Net absorption was 552,126 rsf, up from 225,724 rsf in the previous quarter.

Downtown
Asking rents for Downtown Class A space rose far more slowly, 2.82% to $48.13/rsf, while Class B asking rents rose 6.3% from the previous quarter to $42.49/rsf. A year ago there was a $10.45/rsf differential between Class A and B space Downtown. In Q2 2007 that difference reduced to $5.64/rsf. Class A vacancy dropped from 8.2% to 7.7%, and Class B vacancy reduced from 10% to 9.4%. Total net absorption in Class A was 669,835 rsf, while Class B absorbed 77,425 rsf.

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