No Traction on Rents Despite Leasing Surge

NEW YORK CITY-With 11.7 million square feet of space leased through Sept. 30, Midtown’s office market has already exceeded last year’s total, and is on pace to match not only 2008 but perhaps the 2007 total of 14 million square feet, as well, CB Richard Ellis said in its third-quarter report released Wednesday.

Midtown absorption, too, has turned positive by 4.4 million square feet year to date, compared to 6.9 million square feet of negative absorption during the first nine months of 2009. The availability rate has reached its lowest point since the beginning of 2009 at 13%. However, in Midtown and in the rest of Manhattan, rents remain pretty much in the same ballpark as a year ago, notwithstanding a 51.6% year-over-year gain in leasing volume across the three submarkets.

“We haven’t seen a lot of traction, but we’ve certainly seen price stability,” said Michael Geoghegan, vice chairman with CBRE Consulting, who commented on the Midtown market during a media briefing Wednesday morning. Average asking rents in Midtown have dipped in the past 12 months from  $57.88 per square foot to $55.27.

Downtown, average rents slipped by a smaller percentage YOY, from $39.54 per square foot at the end of the third quarter last year to $38.20 at the end of Q3 this year. Only Midtown South, the smallest of Manhattan’s three submarkets, saw average rents improve slightly, from $42.45 a year ago to $42.93. That being said, CBRE data showed that the taking rent index—initial base rents as a percentage of asking rent—improved YOY across all three submarkets, as landlords have tightened concession packages.

The asking rent declines across Manhattan arguably were a factor in Washington, DC overtaking Manhattan for the first time as the most expensive office market in the US. Cassidy Turley said Wednesday that rents in the nation’s capital rose 3.9% YOY to reach $48.96 per square foot, compared to $48.53 in Manhattan. In fact, Washington was the only one of the 10 most expensive US markets to see rents increase over the past 12 months, according to Cassidy Turley.

While Manhattan landlords are a resolutely optimistic group, “not many think there will be a significant uptick in the next 12 months,” Geoghegan said. Therefore, they’re generally not holding vacant space open in the hope of getting higher rents a year from now.

Rents aside, “we continue to be very confident about the improving health of the Manhattan market,” said Sheldon Cohen, senior managing director and head of CBRE’s Downtown operations. He moderated a panel at the CBRE briefing that also included EVP Brad Gerla and SVP Gerry Miovski along with Geoghegan.

Gerla, who addressed the Lower Manhattan submarket, alluded to the letter of intent Conde Nast has reportedly signed to take one million square feet at 1 World Trade Center, saying the pending deal has created “a lot of buzz Downtown.” And while Downtown’s availability rate has increased this year, due to what Gerla called “the knowns”—large blocks of space that had been anticipated for some time—coming onto the market, he added that the dire predictions of a 20% availability rate in Lower Manhattan never came to pass.

The watchword for Midtown South is “steady as she goes,” said Miovski. He noted that the submarket has rarely shown the kind of volatility seen in Midtown and Downtown, and added that for Midtown South, 2010 is shaping up as the third strongest leasing year on record.

Across the island, there’s an appetite for new construction. “Every tenant in the market Downtown is looking at the Trade Center buildings,” Gerla said. Yet the problem, Geogehgan said, is that the pricing structure isn’t there yet to justify building the space—or, given tenants’ current rent expectations, to lease it.