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[IMGCAP(1)]NEW YORK CITY-Cushman & Wakefield’s third quarter report for Manhattan’s commercial real estate market shows office rents surpassing previous all-time highs for the three submarkets of Midtown, Midtown South and Downtown, despite uncertainty in the financial markets and a decrease in overall leasing activity year-to-date. Year-to-date leasing activity for Manhattan measured 18.3 million sf at the end of the third quarter, down about 2.5 million sf–or 12.3%–from this time last year.

“The slowdown in activity may be attributed primarily to a lack of supply and the historic highs to which rents have risen,” said Joseph Harbert, Cushman & Wakefield’s CEO of the New York Metro Region at this morning’s Market Outlook breakfast presentation. “Limited office space and continued demand has put upward pressure on rental rates, to the point where we have exceeded record highs.”

[IMGCAP(2)]Though year-to-date leasing is off, third quarter leasing activity was in fact stronger than it was in either the first and second quarters according to Kenneth McCarthy, managing director of C&W’s New York Metro Region Research. More than 6.5 million sf was leased from July through September, compared to 6.3 million sf in the second quarter and 5.4 million sf in the first quarter.

“If you look at year-to-date activity for the previous five years, we are currently above average,” Harbert said. “Many tenants are in the market for space and new leases are still being signed, but not at the pace we saw in 2006.”

Midtown South was the only submarket charting increased leasing activity, up 36% year-over-year compared to this time last year. America Online’s 144,400-sf commitment at 770 Broadway was Midtown South’s largest new lease of the third quarter, McCarthy noted. Despite a lag in year-to-date leasing activity, Manhattan rents continued to rise in the third quarter, up more than 37% from this time last year. Midtown, Midtown South and Downtown asking rents all hit record highs, reaching $74.47, $45.83 and $45.86, respectively.

Landlords across Manhattan raised asking rents a minimum of $3 per sf from midyear, with Midtown South class A properties recording an average increase of $7.19 per sf. The exception was class A office space in Downtown, where average asking rents increased slightly less than $1 to $51.43, after crossing the $50 per sf threshold last quarter.

The Madison/Fifth submarket became the second neighborhood in Midtown where class A average asking rents surpassed $100 per sf, up nearly $6 from midyear and reaching $101.84 at the end of the third quarter. Park Avenue average asking rents increased to $110.54, up nearly $10 from midyear 2007. For the first time ever, sublease space in the submarket topped $100 per sf, signifying the allure of a Park Avenue address.

“Owners recognize the value of their assets in such an undersupplied market,” said Harbert. “And many tenants are willing and able to pay.”

More than 70 firms signed leases for $100-plus in 2007. Year-to-date, 14 leases have been completed with taking rents of more than $150 per sf, nine of which were signed during the third quarter. Seven of the tenants were financial services firms.

As far as investment sales goes, at the end of the third quarter, commercial property sales closed and under contract totaled more than $42.4 billion, surpassing the $34.7 billion closed in all of 2006.

“To date, our property sales statistics have not revealed any impact from the uncertainty in the financial and debt markets,” Harbert said. “While activity has slowed since the first half of the year, when a staggering $34.1 billion in sales closed or were placed under contract, investment activity remains robust. Numerous new offerings since Labor Day are garnering strong interest, and attest to the strength of New York’s economic fundamentals and high barriers to entry in all asset classes.”

Class A office properties accounted for more than 60% of all sales at the end of the third quarter. According to Mr. Harbert, demand continues for high-quality office buildings due to strong office leasing fundamentals. Residential and retail investment opportunities also remain in demand.

Private capital drove 70% of sales activity year-to-date, followed by REITs, which accounted for 14%. “We anticipate that REITs, pension funds and foreign investors will become increasingly active as lending terms have tightened, requiring more equity from investors,” Harbert noted.

Pertaining to the retail market, consumer spending bucked expectations and rose in August, according to the Commerce Department. The report was good news for retailers signing new leases, and for those opening new locations during the third quarter. Existing Manhattan retailers recreated themselves in the third quarter, as new concepts emerged throughout the city. Hickey Freeman signed a lease at 96 Grand St. for its new brand, hickey. Tommy Hilfiger’s first women-only store opened in September at 375 Bleecker St.

Retail rents rose steadily in the third quarter. Asking rents in Soho averaged $271 per sf, up from $244 at midyear, and a 27% increase from $212 at this time last year. Madison Avenue asking rents, which surpassed $1,000 per sf at midyear, escalated to $1,045 per sf.

According to Harbert, there has been some sticker shock in reaction to continually rising retail rents, but retailers continue to step into the void, thus eliminating issues created by price resistance. “It’s survival of the fittest in the Manhattan retail market,” Harbert noted. “If one concept isn’t doing well in a certain location, there’s a long list of other retailers capable of paying rent and trying their hand.”

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