Office Leasing Looking Good…For Now

NEW YORK CITY—The city's diverse economy continued to drive leasing during the year's first quarter, according to a new research report by Avison Young, with job growth across all office-using employment sectors.

While the unemployment rate here is 5.4%—compared to 4.9% nationally—increased hiring activity at the start of the year by financial services, technology and information, and professional and business services companies—coupled with slight expansion across these industries—bodes well for office properties.

That activity has partly led to leasing volume of nearly 7.4 million square feet for the first quarter of 2016, compared to 6.6 million in the fourth quarter of last year.

Midtown's overall vacancy rate in the first quarter reached 10.3%, a modest jump from 10.1% in the fourth quarter. Overall average asking rents of $85.62 and $49.96 for Class A and Class B space, respectively, were up from $83.93 and $49.47 in the previous quarter.

Overall, states the report, “the Manhattan office leasing market remains resilient despite global volatility. While volume typically slows during an election year, many tenants continue looking for lower-cost options while still having access to the best amenities that are important to their business and workforce.

“That said,” the report continues, “we would not be surprised to see a modest slowdown in overall leasing activity during the next two quarters, until the Presidential election dust settles.”

Three of the top five leases signed in Midtown during the quarter were new, and Avison Young expects overall tight vacancies to possibly drive further rent gains. This trend has been seen at the top of the market, the report notes, where smaller, high-end financial service and TAMI tenants continue competing for the best space.

Meanwhile, with Midtown South being occupied mainly by TAMI tenants in search of loft-style office space, the submarket continues to have the city's tightest vacancy rate. That metric hit 6.6% for the first quarter, versus 6.8% in Q4 2015. Limited space availabilities continue to drive rent gains across the area's submarkets, with Class A and Class B pricing, respectively, averaging $79.31 and $57.04 per square foot.

Those rents are a spike from the previous quarter level of $73.41 for Class A but a decrease from $59.58 for Class B. The decline in the latter office space type can be attributed to a higher number of lower-rent-per-square-foot buildings, only being partially offset by the higher-priced Facebook deal at 225 Park Ave. South in the Gramercy Park neighborhood. New leases, as compared to renewals, dominated Midtown South by five to one.

In Lower Manhattan, which is still viewed as a value play, vacancy dipped to 10.6% from 11.4% the previous quarter. Average Class A and Class B rents closed the quarter at $63.48 and $42.39, respectively. That's an increase from the prior level of $62.59 for Class A but a decline from $43.30 per square foot for Class B. Leasing in the area has picked up overall, with volume reaching over two million square feet, compared to just under 500,000 square feet in the fourth quarter of 2015.

But with renewals outpacing new lease signings by five to one, the firm expects TAMI and financial services companies to continue dominating the market as they look for lower-cost alternatives beyond Midtown.

NEW YORK CITY—The city's diverse economy continued to drive leasing during the year's first quarter, according to a new research report by Avison Young, with job growth across all office-using employment sectors.

While the unemployment rate here is 5.4%—compared to 4.9% nationally—increased hiring activity at the start of the year by financial services, technology and information, and professional and business services companies—coupled with slight expansion across these industries—bodes well for office properties.

That activity has partly led to leasing volume of nearly 7.4 million square feet for the first quarter of 2016, compared to 6.6 million in the fourth quarter of last year.

Midtown's overall vacancy rate in the first quarter reached 10.3%, a modest jump from 10.1% in the fourth quarter. Overall average asking rents of $85.62 and $49.96 for Class A and Class B space, respectively, were up from $83.93 and $49.47 in the previous quarter.

Overall, states the report, “the Manhattan office leasing market remains resilient despite global volatility. While volume typically slows during an election year, many tenants continue looking for lower-cost options while still having access to the best amenities that are important to their business and workforce.

“That said,” the report continues, “we would not be surprised to see a modest slowdown in overall leasing activity during the next two quarters, until the Presidential election dust settles.”

Three of the top five leases signed in Midtown during the quarter were new, and Avison Young expects overall tight vacancies to possibly drive further rent gains. This trend has been seen at the top of the market, the report notes, where smaller, high-end financial service and TAMI tenants continue competing for the best space.

Meanwhile, with Midtown South being occupied mainly by TAMI tenants in search of loft-style office space, the submarket continues to have the city's tightest vacancy rate. That metric hit 6.6% for the first quarter, versus 6.8% in Q4 2015. Limited space availabilities continue to drive rent gains across the area's submarkets, with Class A and Class B pricing, respectively, averaging $79.31 and $57.04 per square foot.

Those rents are a spike from the previous quarter level of $73.41 for Class A but a decrease from $59.58 for Class B. The decline in the latter office space type can be attributed to a higher number of lower-rent-per-square-foot buildings, only being partially offset by the higher-priced Facebook deal at 225 Park Ave. South in the Gramercy Park neighborhood. New leases, as compared to renewals, dominated Midtown South by five to one.

In Lower Manhattan, which is still viewed as a value play, vacancy dipped to 10.6% from 11.4% the previous quarter. Average Class A and Class B rents closed the quarter at $63.48 and $42.39, respectively. That's an increase from the prior level of $62.59 for Class A but a decline from $43.30 per square foot for Class B. Leasing in the area has picked up overall, with volume reaching over two million square feet, compared to just under 500,000 square feet in the fourth quarter of 2015.

But with renewals outpacing new lease signings by five to one, the firm expects TAMI and financial services companies to continue dominating the market as they look for lower-cost alternatives beyond Midtown.