Rental rates dropped in 2001 - New York City - Brief Article

While rents in Manhattan held more or less steady, despite the terrorist attacks, rental rates across the United States dropped in 2001 as the recession caused many businesses to shelve expansion plans or place unneeded offices up for sublease. The flood of extra space gave tenants options they have not had in several years and caused building owners with direct space to lease to moderate rents and provide additional incentives to compete with cheaper sublease alternatives.

This trend stood in sharp contrast to the previous year, when many markets saw significant increases in rental rates. The seemingly unstoppable economy had fueled heavy leasing activity across the country as business expanded, putting a premium on office space, according to the Studley Effective Rental Index, which reported that 13 out of 15 major metropolitan markets saw rent gains in 2000.

The SERI, which uses numbers that reflect actual negotiated lease terms for Class A properties, as opposed to more general market statistics that often use asking rents based on broker listings, offers a true depiction of rents for commercial office real estate in 15 major metropolitan regions and eight suburban markets. The most recent SERI, which presented numbers on 2001, painted a different picture -- only 8 out the 15 markets analyzed saw increases in total rents.

New York was no exception to this trend, first posting greater than 20% increases in Midtown and Downtown rents at year-end 2000 and then recording slim growth or decreases in rates last year. Still, the city has displayed remarkable resiliency and maintains its position one of the strongest office markets in the nation, the events of Sept. 11 notwithstanding. In fact, Midtown New York remains the most expensive office market in the United States.

Total rents in Midtown grew 22.8% in 2000, climbing from $60.26 per square foot at year-end 1999 to $74, a rate that only San Francisco building owners were able to surpass. In 2001, total rents in Midtown inched up just 0.7%, or $0.54 per SF, to $74.54, while rates in San Francisco dropped nearly 30%. This year has been much harder on the Midtown Class A market, with rental rates dropping and concession packages increasing.

Midtown building owners benefited from tenants relocating from Downtown following the attacks on the World Trade Center. The submarket's diverse economic base became evident as several industry groups, including national law firms, expanded at a time when other central business districts were coping with contracting industries. This growth, coupled with the influx of Downtown tenants, effectively staved off any significant increases in availability space.

Downtown New York posted a substantial decrease in total rent in 2001 compared to the previous year. Total rents Downtown had expanded 21% in 2000, rising from $41.34 per SF at year-end 1999 to $50.04, but suffered a 12.6% drop at year-end 2001, falling to $43.76. While this was a significant drop, Downtown fared better than Boston and San Francisco, which both experienced greater percentage drops in total rents.

Downtown Manhattan had already witnessed a significant increase in available space prior to Sept. 11 due to belt-tightening by financial services firms. After the attacks, this trend accelerated as corporations were forced to relocate either temporarily or permanently to locations in Midtown or outside of Manhattan. While remarkable progress has been made with the cleanup efforts, the outlook for Downtown remains somewhat clouded. However, a substantial package of local, state and federal incentives has attracted attention from tenants and may prompt new leases by the end of the year.

COPYRIGHT 2002 Hagedorn Publication
COPYRIGHT 2002 Gale Group