C&W: Q1 Office Lags, But Long-Term Trends Are Up

NEW YORK CITY-Despite earlier published reports of a soft first-quarter Manhattan office leasing market, the quarter’s bottom-line tally was only slightly below average at 5.8 million square feet, Cushman & Wakefield’s Joseph Harbert said at a media briefing Tuesday. Asking rents rose 7.6% year-over-year across all three submarkets—and the gap between asking and taking rents is narrowing—while projections of continued job growth bode well for vacancy rates long-term.

That being said, Q1 does look sluggish by comparison to the first three quarters of last year, acknowledged Harbert, COO for the New York metro region. Midtown’s leasing volume in particular was off by more than one-third from the first three months of 2011.

But it’s an apples-and-oranges comparison: Harbert noted that last year was the busiest for new leases since 2000, with 30.1 million square feet of new deals, a 12-month figure that 2012 may end up not matching. Certainly, the number of deals for more than 100,000 square feet is not expected to reach last year’s tally of 51. Still, Harbert said, long-term trend lines are positive.

Among them is Manhattan’s vacancy rate overall. It was unchanged from Q4 ’11 at 9.1%, but that compares to 10% a year ago. “You’ve essentially got a market that’s in equilibrium,” said Harbert. It’s headed in the general direction of favoring landlords more than tenants.

Both Midtown South and Downtown saw positive absorption in the quarter, while Midtown ran slightly negative. Deal velocity was off slightly for Midtown South, but that was partly because “there’s not a lot of space available,” given that Midtown South’s 5.9% vacancy rate is the lowest of any CBD in the country.

One of the beneficiaries of that tight Midtown South market was Lower Manhattan, where leasing velocity was up 6.8% YOY. More than 42% of Lower Manhattan’s Q1 activity came from the combined information/media sector, nearly twice the square footage taken in Q1 by financial services firms—the traditional bedrock of Downtown’s office market.

In fact, across Manhattan during Q1, information/media leasing edged out deals for financial services space, comprising 27.8% of the tally compared to 26.3% for the financial sector. Harbert said this was the first time this had occurred.

Notwithstanding sizeable leases such as the 260,000 square feet taken by advertising/communications powerhouse Havas SA in Hudson Square, announced just after Q1 concluded, most information/media deals have tended to be smaller. Mid-sized occupancies drove the market in Q1, Harbert said, with many tenants in the 10,000- to 25,000-square-foot range significantly expanding their office footprints as their businesses grew.

Although unemployment nationally has been ticking downward over the past several years, New York City has outperformed the national economy. With just over 3.8 million jobs, the city’s employment rolls have slightly exceeded the all-time peak set in June 1969, said Ken McCarthy, senior economist and senior managing director at C&W, during Tuesday's briefing. He added that New York City is one of only three US cities where employment is now higher than it was pre-recession, the other two being Houston and Washington, DC.

Employers in New York City added 71,000 jobs in ’11, a figure recently revised upward from the Bureau of Labor Statistics’ earlier projection of 37,400. Projections call for another 93,000 new jobs this year and 75,000 added in 2013, McCarthy said. Even with the new construction going on Downtown and elsewhere, Manhattan’s office supply will still be basically flat compared to the early 1990s, and that means rents will continue to rise and vacancy will continue to ebb, he concluded.