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NEW YORK CITY-Stable was the word that marked the third quarter as the overall vacancy rate for Manhattan remained at 12.5%, unchanged from the second quarter 2003 and up only slightly from 12.3% at the end of the first quarter. The average asking rents continue to soften as the overall average rent finished the quarter at $40.39 per sf, off from $41.12 per sf at the end of the second quarter.

“This is relatively healthy,” said Ken Krasnow, senior managing director, New York offices, Cushman and Wakefield, comparing it to other times of economic downturn. One key difference this time is the sublease space, where there has been active of late. “We’re gearing up for a busy fourth quarter.”

In the sales market, the biggest news, of course, was the highest price ever recorded for an office building in Manhattan–the whopping $1.4 billion Macklowe Properties paid for the GM Building. According to C & W, the sale of this trophy property is an indication that well leased, high quality assets are continuing to be sought after. They expect other trophy assets to come onto the market by year’s end including the Lipstick Building, 111 Eighth Ave., 140 Broadway and 120 Broadway.

“Real Estate is a preferred-asset class,” Krasnow noted.

“It’s a strong capital market,” offered Scott Latham, senior director, financial services group, adding that he expects a continuation of multiple bidders competing for properties. “It’s like I’ve never seen it before. There is competition for every kind of asset.”

Another difference is the sublease market. “We have high quality, built-out space for lease from high credit tenants with good pricing,” said Krasnow. “This is especially appealing to tenants because there is still a reluctance on behalf of tenants to undertake major capital expenditures.” He added that sublease space has become a very viable long-term option. At the end of the quarter, there was 14.3 million sf of space on the market, compared to 15 million sf at the end of the second quarter and 16.3 million sf at the end of 2002. As a percentage of overall available sf, sublease comprises 29.5%. Krasnow noted that the shadow space “phenomena” that was spotlighted earlier in the year seems to have subsided.

The Midtown vacancy rate dropped to 11.9% from 12% last quarter as leasing activity reached 9.2 million sf, on a par with the amount measured at the same time last year. Top leases during the quarter were Kasowitz Benson Torres & Freid with a 140,000 sf renewal at 1633 Broadway, Soros Funds who renewed for 104,152 sf at 888 Seventh Ave. and UFJ Bank who inked a deal for a 90,528 sf renewal and lease reconstruction at 55 East 52nd St.

The Downtown vacancy rate rose slightly during the quarter to 13% from 12.6% at the end of the second quarter, but down from year-end 2002′s level of 13.2 %. This increase came despite the fact that four of the largest leases of the quarter came from Downtown. Legal Aid Society leased 131,878 sf at 199 Water St., American Express signed for 104,944 sf at Three World Financial, New Millennium High School leased 88,000 sf at 75 Broad St. and State Street Bank took 80,000 sf at Two World Financial Center.

There are several major leases pending Downtown that will significantly impact the vacancy rate, including Cadwalader, Wickersham & Taft, the legal firm that will be taking 450,000 sf at One World Financial Center. The space was formerly occupied by Lehman Brothers. Residential conversions in Downtown are also expected to decrease the vacancy rate by eliminating several buildings from the inventory.

“Downtown is a five-day market,” said Joanne Podell, senior director, C & W’s retail group, adding that a 24/7 retail component won’t come into Lower Manhattan until tenants are in place after the residential conversions are completed. “But it will never be Fifth Avenue or Madison.”

The Midtown South vacancy rate dropped during the quarter, to 13.7%, from 14.5%. Two key signings were at 111 Eighth Ave.–Double Click signed for 76,000 sf and Deutsche Inc. renewed for 123,000 sf.

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