Manhattan leasing and sales activity remains high - First Quarter Review

While New York City employment stands 81,200 jobs higher than a year earlier and the bull stock market has fitfully revived, the Manhattan office market started 1999 at a slower pace after two back-to-back record-breaking years.

With traditional large space users stalling expansion, overall leasing activity was clown 17 percent over the first quarter of 1998, the lowest level of first quarter activity since 1995, when 5.8 million square feet (msf) was leased.

Net absorption, the change in occupied space for a given period of time, started the year in negative territory. For the first quarter of 1999, net absorption totaled a negative 299,818 square feet (sf), compared to last year's positive 2.1 msf. This negative absorption was propelled by the addition of 7.9 msf to the market. Most of this new availability was in small or mid-sized blocks. A few key large blocks, however, were added in the Grand Central District of Midtown, for a total of 650,000 sf; and a large block of 565,000 sf was added Downtown in the Insurance District. Space upgrades and consolidations explain the space.

Despite excellent fundamentals, the "old guard" of the New York economy - financial service firms, law and insurance - has laid low in the past few quarters amidst a volatile stock market. However, Internet, software and telecommunications firms rode a new wave of activity for small and medium sized-space. These companies dominated new leasing activity in parts of Midtown South and Downtown during the first quarter of 1999.

Total leasing activity in Midtown for the first quarter of 1999 was 4.5 msf, a 12 percent drop over the first quarter of 1998. While new leasing was driven by expansions at the lower end of the market, four deals over 100,000 sf were conducted in the first quarter: Donaldson Lufkin and Jenrette leased 159,000 sf at 280 Park Avenue East; Caisse Nationale de Credit Agricole committed to 127,000 sf at 666 Third Avenue; Lazard Freres took 112,000 sf at 600 Fifth Avenue; and fast-growing Internet advertising firm Doubleclick leased 100,000 sf of loft-type space at 450 West 33rd Street, which formerly housed Sky Rink.

For the first quarter of 1999, leasing in Midtown South totaled 885,000 sf, a 26 percent drop from one year ago, when 1.2 msf was leased. The top deals in the quarter included Union Health Center taking 76,000 sf at 275 Seventh Avenue; Partners & Shevack leasing 30,000 sf at 215 Park Avenue South; and Mark Communications taking 25,000 sf at 105 Madison Avenue.

The most interesting area of Manhattan continues to be the Downtown market. In recent quarters, the leading "news" was very active leasing activity generating sharp increases in asking rents. Prior to that, the Downtown story was residential conversion of obsolete space.

Today, with technology driving growth in the local economy, the leasing of space to computer, Internet and "new media" firms is leading the way.

The top lease for the latest quarter was Sun Microsystems taking 89,000 sf at Two World Trade Center. Platinum Technologies agreed to lease two floors at 140 Broadway for a total of 48,000 sf, while theglobe.com took 47,000 sf at 120 Broadway. Level 3 Communications leased 41,000 sf on two floors at 100 William Street, and Individual Investor Group took 34,000 sf at Two New York Plaza. A significant share of the smaller leases (10,000 to 25,000 sf) was also signed by computer-related companies.

The largest "new media" leases are no longer in Class C buildings, but in Class A or top Class B buildings - offering these tenants proximity to their financial sector clients. Rather than to start-ups, the majority of space was leased to established technology firms.

Despite the added availabilities during the last two quarters, vacancy rates are down from one year ago. The overall vacancy rate for Manhattan fell to 8.7 percent from 9.1 percent over the last 12 months. Both the Midtown and Midtown South overall vacancy rates rose slightly, while Downtown continued to drop.

The Midtown and Midtown South overall vacancy rates both climbed to 8.3 percent, as asking rents generally moved upward from one year ago.

The Midtown overall direct weighted average asking rent climbed to $40.53 psf from $34.68 psf last year, a rise of over 14 percent. The average Class A asking rent in Midtown jumped to $47.78 psf from $41.50 psf. In Midtown South, the overall average asking rent rose from $20.21 psf to $26.66 psf, a 32 percent jump.

The average Class A rent in Midtown South climbed to $32.09 psf from $29.07 psf, a 10 percent rise. The overall Downtown direct weighted asking rent rose to $31.32 psf from $27.21 psf one year ago. The average Downtown Class A asking rent jumped from $33.36 psf to $38.69 psf.

With a total of 14 major building sales during the quarter, investment activity picked up after a slowdown in the last half of 1998. The largest sale, in terms of total price, was 14 Wall Street, purchased by Stellar Management for $100 million.

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