NEW YORK CITY-Average asking rental rates for Manhattan’s class B buildings continued to rise faster than rates for the city’s trophy-quality buildings, a trend that began around the beginning of the year, according to a recent report by Jones Lang LaSalle. Midtown South saw the largest increase at midyear 2007, with the submarket’s class B buildings posting rate increases of 14.4%.

Rents for Midtown South class B buildings rose to $47.87 per sf in the second quarter of 2007 from $41.83 per sf in the first quarter of 2007. The submarket was the only sector of Manhattan to see class A rents grow at a larger pace than class B rates. Midtown South class A average asking rents jumped 61.1% at midyear 2007 after a block of 96,000 sf of office space at 11 Madison Ave. was put on the market with asking rents in the upper $80s. Class A average asking rents in the submarket’s increased to $71.18 per sf from $44.18 per sf the previous quarter.

“With tenant interest in Manhattan office space continuing unabated, average asking rental rates will escalate further,” says James Delmonte, VP and director of research, with Jones Lang LaSalle’s New York City office. “Most of New York’s office submarkets have reached single-digit vacancy rates, and new space is not being added to the market fast enough to meet demand.”

Midtown South should continue to see significant escalation in rental rates as it was the tightest office market in Manhattan at midyear 2007. Trinity Real Estate’s decision to convert 330 Hudson St. to residential or hospitality use took more than 400,000 sf of office space off the market. As a result, class A vacancy rates in Midtown South fell 44.4% at midyear 2007, dropping to 2.8% from 5% in the first quarter of 2007. Class B buildings saw vacancy rates fall 29.4% during the same time period, slipping to 4.4% from 5.9%.

Class B office buildings in Midtown and Lower Manhattan also recorded large increases in average asking rental rates. Rents for Midtown’s class B buildings climbed 12.2% in the second quarter of 2007, rising to $57.82 per sf from $51.54 in the first quarter of 2007. The submarket’s class A buildings recorded a rent hike of 8% during the same time period, rising to $91.56 per sf from $84.81 per sf.

In Lower Manhattan, class B office buildings posted a 7.8% increase in the second quarter 2007, rising to $43.21 per sf from $40.10 per sf in the first quarter. Class A rates rose 7.6% in the same time period, increasing to $51.66 per sf from $48.01 per sf.

Midtown saw vacancy rates fall slightly in all property classes. Class A office buildings saw a 4.9% decrease in the second quarter of 2007, falling to 7.32% from 7.7% in the first quarter of 2007. Vacancy rates in Midtown class B buildings dropped 2.4% during the same time period, reaching 7.3% from 7.6%.

Although Lower Manhattan was the only market to see a rise in vacancy rates, and in all property classes, the increases were minimal. Class A buildings Downtown saw vacancy rates rise 1.1% at midyear 2007, increasing to 7.08% from 7%. Class B vacancy rates barely changed, inching to 10.43% from 10.4%.

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