NEW YORK CITY-Midtown Manhattan office vacancy has dropped below 7% and the rental market has, to the some extent, lurched to favor the landlord. But the most startling rent reality may be yet to come; and it may come sooner than expected.

Cushman & Wakefield earlier this week released second quarter statistics for the Manhattan office market showing Midtown vacancy rate dropping to 6.9% at midyear, down from 7.8% at the end of the first quarter. This decline brings the overall Midtown vacancy rate below the 7% to 9% range, which is typically described as equilibrium, for the first time in five years.

“A shortage of high-quality available space in Midtown and a lack of new product on the horizon have given landlords the upper hand,” says Joe Harbert, Cushman & Wakefield’s chief operating officer for the firm’s New York Metro Region.

Year-to-date, vacancy rates are down across all three major Manhattan submarkets of Midtown, Midtown South and Downtown. The most significant decline over the last year occurred in Midtown South, which experienced its lowest vacancy rate since the first quarter of 2001. Availability dropped to 6% at midyear 2006, down 3% from midyear 2005.

Harbert discussed the tightening Midtown and Midtown South markets. “The vacancy rate, as well as large blocks of available space, is shrinking in Midtown. This lack of space is contributing to fast-rising rents for the city’s best buildings. Pair that with Midtown South’s extremely low vacancy rates, and companies are going to want or need to explore their options Downtown.”

Year-to-date, 20 leases have been signed with rents above $100 per sf, compared to just 10 in all of 2005. Twelve of the 20 were financial services tenants, which may be setting the bar for future sf prices.

Where rents are going to settle is anyone’s guess. discussed rent levels with Harbert while he discoursed on what he deemed his theory. “And this is just my theory, but I think the New York market is searching for pricing right now,” Harbert told “You put out at $92 and you your get $88. People are experimenting, whereas in the past they would have never thought of asking $92. Finding the price to ask today is a huge question.”

The statistics don’t show what it really happening when crunching numbers for the average Manhattan rate of $43.46, according to C&W. This is because there are places Downtown where the very low end of the rent spectrum skews the high-end in Midtown when everything is totaled.

“I think what happened is the market has become more open sharing information,” says Harbert. “Comparisons are more readily finding their way to the market. People are saying, ‘gee, if the guy down the street got this much for his house, then I can get this much for mine.”

Because of this and the dearth of office space in Midtown, enormous rental rates could be seen like never before in the heart to the city. “I wouldn’t be surprised if we see $200 rates by Dec. 30,” says Harbert.

He quickly reeled off numerous Park Avenue and 57th Street properties that are in negotiation or close to closing in the $100, $120 and even the $155 range. But remember, says Harbert, “technically Manhattan is a landlord’s market, but many things can derail that–a slow down in job growth, inflation.”

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