Colliers: 2014 Office—So Far, So Good

NEW YORK CITY—Good news for Manhattan office investors: the market showed solid gains in the first quarter of 2014, according to new research from Colliers International. The real estate services firm cited declines in overall availability and vacancy rates while asking rents rose. However, the three major markets had differing performances.

Midtown South and Downtown saw strong leasing activity, with new tenants entering these markets as well as existing occupiers adding employees. The demand for space in Midtown, however, is feeling the impact of major tenants relocating or not achieving organic growth.

“The Manhattan office market continues to improve overall, and if this pace continues we are poised for a healthy year,” says Joseph Harbert, president of the eastern region. “We also saw a clear shift in leasing patterns. Midtown recorded just an average quarter, at best, whereas Midtown South and Downtown were both dramatically more active relative to historic norms. There were several major relocations to Lower Manhattan, indicating the extent to which the accepted paradigms of the Manhattan leasing market have changed over the past few years.”

The overall Manhattan office availability rate was 11.4% at the end of the first quarter, down slightly from 11.7% in the end fourth quarter of 2013 and down from 12.1% year-over-year.

Despite the overall declines, Midtown registered an 11.8% availability rate in the first quarter, up slightly from 11.2% in the fourth quarter of 2013 and 11.6% in the third quarter. Availability increased as blocks of space that will lose their current occupiers over the next several years to relocations outside of Midtown started to be listed as available in recent quarters.

The overall Midtown vacancy rate also has remained essentially flat over the last five quarters—in the 6.8% to 7.1 percent range. Unless new demand develops, the Midtown North rate will climb as space is vacated over the next several years.

Meanwhile, Midtown South's overall availability rate dropped to 8.8% in the first quarter of 2014, down from 9.7% in the fourth quarter and just slightly lower than the 9% it hit a year ago.

Yet it was Downtown that showed the largest improvement in absolute levels. At 14.4%, the submarket's overall availability rate declined from 15.6% in the fourth quarter and from 16.1% year-over-year. Also, after moving higher for much of 2013, Downtown's vacancy rate declined to 7.8%, down from 8.3% in the fourth quarter but still up significantly from 5.3% year-over-year.

Overall Manhattan average asking rent also continued to rise, reaching its highest level since the fourth quarter of 2008. At $63.59 per square foot, asking rents are up 5.2% from $60.46 per square foot in the fourth quarter and 14.1% from $55.74 per square foot year-over-year.

Investor interest in Manhattan office buildings remains strong, supported by low overall financing costs and increasing rents in most sectors of the market. Additionally, international buyers see Manhattan as a safe haven, with Chinese buyers being particularly active.

Twenty-one investment sales transactions closed in the first quarter, totaling nearly $1.4 billion in activity. Though the activity was less than half the $3.8 billion volume registered a year ago, more than $5.5 billion of transactions are under contract.