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[IMGCAP(1)]NEW YORK CITY-Top firms CB Richard Ellis, Cushman & Wakefield and Jones Lang LaSalle all note the same trend here in Manhattan for the first quarter of 2008. The local market shows continued increases in asking rents for office space in the city despite weakening job growth and negative absorption.

During a Wednesday media luncheon, Los Angeles-based CB Richard Ellis presented its April 2008 Manhattan MarketView Snapshot and pointed out that despite slowing rent growth, all three Manhattan markets achieved all-time monthly rent highs in March. Midtown rents remained the strongest of the three markets, with March asking rents at $85.61 per sf, up from $84.27 in February and $72.25 a year ago. Leasing inched up month-over-month, but was 3.9 million sf for first quarter 2008 compared to nearly three million sf first quarter 2007.

“We appear to have passed an inflection point, as the leasing market weakens, albeit at a gradual pace, due to the slowing US economy and turmoil in the financial markets” said John Powers, New York Tri-State Region chairman of CBRE, at the luncheon. “Manhattan should see rents begin to dip, but we do not expect a flood of sublease space to come on the market, as New York seems less affected by the recent job eliminations in the mortgage sector in southern California and the southwest. At the same time, most of Manhattan’s landlords, especially REITs, appear to be well-positioned with low vacancy and strong balance sheets.”

[IMGCAP(2)]Powers also spoke on capital markets, noting that “the credit crisis has made it much harder to obtain debt financing, especially on larger transactions where a consortium of lenders is required rather than the once robust CMBS market. Volume is down tremendously from last year’s record high of $12.8 billion in the first quarter to $1.5 billion in first quarter 2008, but compares favorably with the $1.1 billion of Manhattan office sales in the same period of 2005 and the $2 billion in sales in 2006,” he said.

“Job growth is the best measure of commercial real estate’s economic health, and right now employment is contracting,” added Raymond Torto, global chief economist at CBRE, who also spoke at the company’s luncheon. “The effects are being felt especially in housing-dependent economies in the southwest and Florida. However, all markets enter this phase of the cycle in healthy condition. The sharp rise in office rents over the last few years has provided a cash flow cushion to existing owners even if market rents turn down.” Torto added that the ‘investor strike’ is retreating, but has not ended. “Many capital sources sense opportunity, but no one wants to be first and wrong on a purchase or sale. As a result, the bid-ask spread remains wide as buyers and sellers await price discovery and the market establishes a new equilibrium price.”

[IMGCAP(3)]Locally based Cushman & Wakefield’s first quarter report for the Manhattan market, like CBRE’s report, shows continued increases in asking rents for office space throughout the city, despite a slowdown in leasing activity and an increase in vacancy rates. Overall asking rents for Manhattan reached $67.13 per sf at the end of the first quarter, up more than 25% from $53.43 at this time last year. Class-A asking rents soared more than 23% year-over-year, reaching an average of $79.78 per sf. At the same time, leasing activity continued to slow. At the end of the first quarter, five million sf in new leases had been signed, about 8% off compared to first quarter leasing in 2007, the report found.

“Office leasing has slowed in the first quarter in direct response to economic uncertainty,” said Joseph R. Harbert, COO for Cushman & Wakefield’s New York Metro Region, at the firm’s breakfast presentation Tuesday morning. “Although we have not seen financial industry write-offs turn into major layoffs in New York, we have seen that financial services sector leasing demand has weakened.”

Following C&W’s Q1 report presentation, Bruce Mosler, president and CEO of C&W, spoke briefly to attendees, noting that commercial real estate is facing an uncertain economy from a position of fundamental strength. “Until this quarter, years of uninterrupted job growth fueled office leasing and investment demand and limited new construction kept supply in check in most major US markets. On top of the fundamentals, New York, in particular, has a position of strength stemming from its reputation as the global financial and business capital,” he said.

[IMGCAP(5)]Mosler added that the changing market conditions create new opportunities for tenants that have been squeezed in Manhattan’s tight market for the past several years. He further noted that Manhattan continues to offer room for rent growth and “deals are still getting done. This marketplace is in pretty good shape,” he said. “From a standpoint perspective, the future is bright.”

Harbert explained that as far as investment sales goes, the current lending environment has caused a shift in the investor profile, with a noticeable increase in activity from foreign buyers and institutional investors. Foreign investors accounted for 45% of sales closed and under contract in the first quarter, a sharp contrast to last year when this type of investor accounted for only 15% of Manhattan’s sales volume. “Recent actions by the Federal Reserve and the major financial institutions have made it clear that efforts are being made to recognize losses and put them behind us,” Harbert said. “This is promising for the marketplace, and has helped to build confidence.”

[IMGCAP(4)]Jones Lang LaSalle also reports that despite a rise in overall office vacancy rates in every submarket here, building owners still achieved moderate rent increases in the first quarter of 2008. The firm’s Q1 ’08 report shows class A buildings in Manhattan recording both the largest rent hikes and the biggest increase in vacancy rates. “Given the current economic climate, it is not unexpected for rents to begin leveling off,” notes James Delmonte, VP and director of research.

As Grubb & Ellis found in its Q1 ’08 outlook, which GlobeSt.com exclusively reported on Tuesday morning, JLL forecasts relatively flat rent growth throughout New York City for the remainder of the year. Office vacancy rates rose throughout the city in the first quarter of the year, JLL says. Overall vacancy rates rose 7.6% in the first quarter of 2008, increasing to 7.7% from 7.1% at year-end 2007. Class A vacancy rates grew 9% in the same time period, rising to 7.2% from 6.6%.

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