Increased corporate demand tightens Midtown office market - New York, New York - Mid-Year Review and Forecast, Section I

Persuaded by the strong national and local economies, companies that had put off real estate decisions throughout the uncertainty of the late '80s and early '90s are now more confident about making financial commitments to expand or relocate. Specifically, the rebound in the professional services sector - including law, finance, insurance and business services - has created a significant increase in competition for Midtown office space. As a result of this pent-up demand from Corporate America, the tremendous leasing activity experienced in the Midtown office market throughout 1997 continued during the first half of '98, driving rental rates higher, and causing a substantial dwindling of concessions.

Much of the leasing volume in Midtown during the first part of '98 is the result of several transactions well over 100,000 square feet. Among some of the largest leasing transactions that have closed this year are: Chase Manhattan Bank's renewal/expansion for 448,517 square feet at 1211 Avenue of the Americas; Ziff-Davis, Inc. for 337,653 square feet at 63 Madison Avenue; Schroder & Co., Inc.'s renewal/expansion for 207,986 square feet at 787 Seventh Avenue; Santander Investment for 198,000 square feet at 1251 Avenue of the Americas; and Sakura Bank, Ltd. for 116,500 square feet at 101 Park Avenue.

Vacancy rates continue to drop throughout the entire Midtown market, with rates well into the single digits in nearly all segments of the market. The overall vacancy rate in Midtown is currently hovering around 5 percent, with rates in prime submarkets such as Grand Central, Times square and the Plaza District below 4 percent.

The ever-tightening market for Class A product continues to impact the availability of Class B inventory. Class B vacancies have already dropped significantly and will continue to decline. This has sparked many owners of lesser quality buildings to upgrade and reposition their properties.

Decreasing vacancies and increased competition for space has pushed up average asking rental rates and given landlords a considerable edge in lease negotiations. Average asking rental rates in Midtown now average more than $42 per square foot for Class A product. In fact, asking rents in some of Midtown's most desirable buildings have reached $60 per square foot.

With the stock market gaining and interest rates holding steady, the City's local economy is expected to remain strong. As a result, rapid corporate expansion and subsequent employment growth will continue, causing space to tighten further and rents to rise higher. However, if market dynamics force rental rates into the $60 per square foot range - above replacement costs - and if lenders continue to see supply outpace demand, new construction will become inevitable. The market's current conditions have already resulted in a record amount of new construction of over seven million square feet, as well as plans for several additional projects. As the shortage for quality office space persists, the enormous pool of capital now available for acquisitions will likely be redirected in part to new construction.

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