Manhattan office vacancies stabilize in 2003 led by strong sublease and renewal activity (US)

Cushman & Wakefield today released fourth quarter statistics for the Manhattan office market that indicate the overall vacancy rate stabilized in 2003, led by substantial subleasing activity and lease renewals. For the three- and six-month periods ending Dec. 31, the overall Manhattan vacancy rate remained at 12.5 percent, up only slightly from 12.0 percent at the end of 2002.

Subleases accounted for 14 of the top 25 new leases in 2003 (not including renewals), up from eight of the top 25 in 2002. Sublease space availabilities declined 20.5 percent over the past 12 months, from 16.3-million-square-feet to 12.9-million-square-feet. Direct space availabilities increased over the same period by 18.5 percent, from about 30.1-million-square-feet to 35.7-million-square-feet. Manhattan´s office
space inventory totals about 390-million-square-feet.

Renewals accounted for 14 of the top 25 largest leasing transactions in 2003, up from 11 in 2002. Ken Krasnow, senior managing director and head of Cushman & Wakefield´s New York offices, said the increases in subleases and renewals this year
indicate that tenants expect the market to rebound from current levels. 'The market inherited an unprecedented amount of sublease space over the past two years,' Mr. Krasnow said. 'But the type and quality of the space was also unprecedented.

'Tenants have taken advantage of long-term subleases in great space from high-credit companies,' he added, 'making some sublease opportunities virtual-direct-deals.' Mr. Krasnow said historically subleases were short-term, and undesirable for companies with long-term space needs. At the end of December, the sublease vacancy rate returned to 3.3 percent, its lowest level in two years and one full percentage point lower than its high of 4.3 percent in the second quarter of 2002. 'Tenants are acting on opportunities to sublease and renew before the market turns,' said Mr. Krasnow.

For the one-month period ending Dec. 31, all three Manhattan submarkets experienced declines in their overall vacancy rates. From the end of November, Midtown dropped from 12.1 percent to 11.9 percent, Downtown fell from 14.2 percent to 13.5 percent and Midtown South´s vacancy declined from 13.6 percent to 13.3 percent. The only sustained decline year-over-year occurred in Midtown South, where the vacancy rate decreased from 13.5 percent at the end of 2002, and from its high of 14.5 percent at
the end of June. The Midtown vacancy declined 0.1 percent for the six-months ending in December, from 12.0 percent to 11.9 percent. From the end of the third quarter, Midtown´s vacancy remained steady at 11.9 percent, while Downtown´s vacancy increased from 13.0 percent to 13.5 percent.

The average asking rental rate for Manhattan office space experienced its first quarterly increase since the fourth quarter of 2000, from $40.39 at the end of the third quarter, to $40.53 at the end of December. Rents Downtown increased during the quarter from $35.60 to $36.92, while rents in Midtown decreased from $45.63 to $45.37, and rents in Midtown South decreased from $30.75 to $30.37.

According to Mr. Krasnow, the most significant impact on vacancy rates throughout 2003 - in addition to the surge in subleases and renewals - was an influx of larger transactions. In 2003, he said, 34 deals were completed in excess of 100,000-square-feet, compared to a total of 23 such transactions in 2002.

Increased renewal and sublease ac tivity have added stability and strength to the Manhattan market. These factors, along with a rise in larger leases and less space coming onto the market, have contributed greatly to the overall vacancy holding steady at 12.5 percent for the past six months. Although the economy is gathering momentum, substantial job growth, the most important factor influencing demand in the office market, may not occur until mid-to-late 2004. Since real estate typically lags the overall economy by six-to-eight months, Mr. Krasnow said the office market may not realize any job growth as significant-vacancy-declines until t

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