Midtown vacancy declines as rental rates rise

Tight market conditions during the third quarter of 1999 resulted in a decrease in vacancy rates and an increase in rental rates in the Midtown Manhattan office market. The high volume of absorption in the third quarter indicates that the "wait and see" mentality that was prevalent in the market during the first six months of the year has passed, and tenants are now more confident in the economy and willing to address their growing space needs.

Leasing activity in Midtown during the third quarter of 1999 reached 4.9 million square feet, compared to 4.8 million square feet reported during the third quarter of 1998. Net absorption in the third quarter of 1999 was 1.2 million square feet, down from 1.4 square feet for the third quarter 1998.

During the past 12 months, the Midtown vacancy rate has decreased dramatically- to 3.94 percent from 5.86 percent for direct space and to 4.71 percent from 6.2 percent for total vacancy (direct and sublet). Decreasing vacancy and increased competition for space have pushed the average asking rental rate from $40.94 per square foot in the third quarter 1998 to $47.07 per square foot just one year later.

Large blocks of space are in short supply in Midtown, with only one block in excess of 50,000 square feet (622 Third Avenue) and four blocks in excess of 30,000 square feet (622 Third Avenue, 825 Third Avenue, 1633 Broadway and 1166 Avenue of the Americas).

The lack of available space led to the absorption of much of the sublease space on the market during the third quarter of 1999. Credit Suisse Asset Management leased the Swiss RE block at 237 Park Avenue (229,817 square feet) in a direct deal with ownership, and Wasserstein Perella subleased 120,000 square feet from RJR Nabisco at 1301 Avenue of the Americas.

The only remaining block of sublet space over 100,000 square feet on the market is at 1251 Avenue of the Americas, where Banco Santander is disposing of 198,000 square feet.

It is impossible to predict with any degree of exactitude the precise moment when rental rates in New York's protracted bull market will reach their zenith. Although market fundamentals are extremely positive from the owner's perspective, predicting the point in time when this market's steady rise begins to level off (if not recede) in the months ahead is anyone's guess. Despite what the optimists propagandize for the new millennium, no one really knows.

We do know, however, that Wall Street's unprecedented run over the last decade will not last forever, and when it corrects, we are certain that the demand for first class office space will soften.

COPYRIGHT 1999 Hagedorn Publication
COPYRIGHT 2004 Gale Group