Office Market Remains Stable Mid-Year, Despite Obstacles

NEW YORK CITY-Year-to-date the overall Manhattan office market remains stable; however, there are obstacles testing the market, according to Ken Krasnow, executive managing director and head of Cushman & Wakefield’s New York offices.Speaking at the firm’s Mid-Year NYC Commercial Real Estate Market Analysis and Outlook this morning, Krasnow said that vacancy rates are down, rental rates are up and absorption is positive, but leasing activities have slowed, finishing below 2004 mid-year levels. “Market activity has paused and we may be at a tipping point,” he said. “Statistically speaking, the market looks relatively healthy. Although the supply side is balanced, the demand side has grown more tenuous.”In Midtown, the class A vacancy rate dropped for the sixth consecutive quarter to 9.2%, down a point from year-end 2004 and from 11.5% in mid-year 2004. Overall Midtown rate was also 9.2%, down from 11.3% a year ago, according to Cushman & Wakefield. The total available supply also decreased 18% to less than 22 million sf–the lowest level in three years, the firm added. Midtown also saw the trend of companies taking high-quality class A space continue in the second quarter. For example, Viacom leased 271,014 sf at 1540 Broadway; and McDermott, Will & Emery leased 156,435 sf at 340 Madison Ave.One area that is seeing obstacles is Downtown, with uncertainty leading those stumbling blocks, Krasnow added. However, there is now an “enormous opportunity” to shift the focus Downtown with the defeat of the financing deal for the West Side stadium and the city’s loss in the race for the 2012 Olympics, he said. That focus must now turn to the infrastructure–such as transportation and the development of the Fulton Street hub–and commitment to redevelopment–with uncertainties such as a firm timeline and final design for the World Trade Center, he continued.There are shining spots in Lower Manhattan. The class A vacancy rate Downtown dropped more than two full percentage points from this time last year to 11.5%, according to Cushman & Wakefield, the lowest it has been in three years. Two subleases at One New York Plaza totaling 254,353 sf and the residential conversion trend pushed the vacancy level down, the firm reported. However, asking rates continue to decline, Krasnow added. Overall rents decreased to $31.20 per sf from $32.25 per sf in mid-year 2004, and were down from $36.36 per sf in 2003, he added. The shift in Downtown leasing to smaller deals continued in the second quarter, with leasing activity off nearly one million sf from mid-year 2004. According to Krasnow, tax incentives and lower rental rates than Midtown make Downtown “a smart move for tenants who want to remain in Manhattan but have been priced out of Midtown.”However, he added, “without the city redirecting its efforts Downtown and improvements to infrastructure Downtown is in danger of continuing to lose large-scale relocations and not to realize its full potential to become a true world-class business environment.”