Office Uptick: Not Just in Manhattan

NEW YORK CITY-Office leasing activity rose during year over year, Cushman & Wakefield said Thursday in a new report, and not just in Manhattan. While two of the island’s three submarkets saw vacancy declines in the third quarter—the third, Downtown, saw an uptick due to large blocks of space from just a handful of properties, vacancies that had been widely expected—so did a total of 15 of the 30 CBDs tracked by C&W, and a total of 18 saw YOY increases in leasing volume.

However, while leasing volume rose and vacancies fell, asking rents remained largely static, although a few markets recorded modest quarterly gains. It’s fair to see a correlation between the vigorous traffic and the lack of significant price increases, Maria Sicola, executive managing director and head of Americas research for C&W, tells GlobeSt.com.

“There are tenants, especially those in a position to renew or that may be renewing in the next 24 months, who sense we’re at the bottom of the market,” says Sicola. “As they see activity increase, they’re beginning to act on these low rents.”

Rents ultimately will rise as leasing activity and vacancy rates continue to improve, she says. Some markets already ahead of the curve, such as Midtown Manhattan and Washington, DC will get there earlier; Sicola sees improvements through next year and “more significantly in 2012.”

Outside the major markets, office vacancies tend to be higher, and the suburbs will be slower in recovering. “We don’t see those markets turning until 2013,” Sicola says. “Part of that is that in most markets, we’re still looking at very slow employment growth through 2011.”

As it stands now, year-to-date leasing activity for the CBDS measured by C&W totaled 45,5 million square feet, a 31.6% year-over-year gain on the first nine months of 2009. The biggest YOY jump was in Manhattan’s Midtown South, up 179.1%, followed by Denver with a 120% gain, an 88% increase for Westchester County in New York, 79.8% improvement in Philadelphia and a 67.3% rise in Midtown Manhattan.

A closer examination of individual CBDs reveals specifics of the submarkets as leasing velocity rises. For example, while San Francisco’s overall vacancy rate is 12.9%—already ahead of the national average, which Cassidy Turley puts at 16.8%—“there’s an area south of Market Street that has become very popular with technology firms,” Sicola says. “The vacancy rate in that area is 10%, which is much closer to an equilibrium position. You’re starting to see some pressures on the rents there, compared to what we’re seeing in the financial district.”

Cities that are more apt to draw tenant sectors in growth mode will lead the way in vacancy declines. “You see that in Portland, OR, in Philadelphia even though it had a slight uptick in its vacancy or Boston,” says Sicola. “What do you have in these markets? It’s the composition of the industries, and industries that are holding their own or doing well in this market.”

YTD absorption among the CBDs tracked by C&W was negative 1.25 million square feet. Although that represents a 64% quarterly decline in absorption from negative 441,498 square feet at midyear, it’s a 96% YOY improvement from the negative 32.1 million square feet at the end of Q3 ’09.