Strong activity in 2003 spills over into 2004

Activity was limited in the New York commercial real estate scene during much of 2003.

However, in the final quarter of the year a frenzy of deals hit the market, and the activity spilled into the new year and accelerated as the first quarter of 2004 progressed.

Midtown tenants signed for 4.93 million square feet of space in the first quarter of 2004 compared to 4.02 million square feet in the final quarter of 2003, representing an 18.46 percent increase in leasing volume.

The Downtown submarket saw its leasing activity increase 37.7 percent, with tenants signing for 1.51 million square feet in the first quarter of 2004 compared to 941,237 square feet in the final quarter of 2003. Overall leasing volume for Manhattan increased by 15.77 percent, with space users taking 6.91 million square feet in the first quarter of 2004 compared to 5.82 million square feet in the fourth quarter of 2003.

The increase in the flow of deals in the final months of 2003 and the beginning of this year bodes well for the health of the New York market.

While the number of deals under way has not been enough to fuel a sharp spike in market rents, they have helped to prompt a steady increase.

Midtown Class A asking rents have risen $1.41 per square foot since yearend 2003, increasing from $51.73 per square foot in the fourth quarter of 2003 to $53.14 per square foot in the first quarter of 2004. Downtown Class A asking rents have risen $0.36 per square foot since year-end 2003, increasing from $33.49 per square foot in the fourth quarter of 2003 to $33.85 per square foot in the first quarter of 2004. With momentum continuing to build in the market, New York should continue to see moderate rental rate growth this year.

Heavy leasing activity helped keep vacancy rates stable throughout Manhattan. Midtown Class A vacancy rates (direct and sublease space) rose slightly, increasing from 9.59 percent in the final quarter of 2003 to 9.71 percent in the first quarter of 2004.

Downtown Class A vacancy rates (direct and sublease space) grew from 11.22 percent in the final quarter of 2003 to 12.14 percent in the first quarter of the year.

It appears that activity this year among the city's space users has been strong enough to chip away at the millions of square feet of Manhattan's shadow space, which is office space that is not officially on the market.

Much of the shadow space is being held by corporations that took the space in anticipation of growth that was prevented by the economic downturn and uneasiness following Sept. 11, 2001.

With the economy picking up and businesses hiring again, tenants are finding a use for the shadow space, rather than trying quietly to lease it out.

Law firms were the most active industry in Manhattan in 2003 in terms of gross leasing activity, and also led the market in the first quarter of 2004.

The financial services firms that typically rank first in gross leasing activity took a back seat to law firms last year, and continued to do so in the first quarter of 2004.

The legal sector led all other New York businesses in leasing activity in the first quarter of 2004, taking 1.55 million square feet of office space throughout the city. The banking sector came in a close second, signing for 1.2 million square feet of space. Accounting firms took the No. 3 spot with 836,400 square feet of space leased, and the financial services sector posted 516,300 square feet of leasing activity.

In 2003, the legal industry recorded 3.9 million square feet in gross leasing activity, compared to 2.9 million square feet for the financial services industry.

The financial services section, however, appears to be gaining steam due to good news on Wall Street and rising employment statistics.

Banks were the most active companies in the financial services sector in the first quarter of 2004. The demand coming from the financial services firms has always been very important to the New York market.

After several years of declining rents and rising vacancy rates, the recent positive statistics posted by the New York real estate market are a major shot in the arm for the city.

Manhattan has finally reached the bottom of this real estate cycle and has begun the slow climb back to a vibrant, healthy market.

BY FRANK DOYLE MANAGING DIRECTOR, JONES LANG LASALLE

COPYRIGHT 2004 Hagedorn Publication
COPYRIGHT 2004 Gale Group