The vacancy rate dropped 20 basis points to 4.9%--its lowest level in more than 25 years--and average asking rent on all classes of space increased $2.15 per sf from the second quarter to $69.55 per sf. Investors, however, were not as bullish on the real estate market as landlords were, as the blistering pace of investment of the first half of the year showed evidence of slowing, the report noted. In Q3, $5 billion in transactions were completed, which is a sharp decline from the $13.1 billion average in each of the two previous quarters. Still, with more than $31 billion in total investment transactions so far this year, the market is on track to double 2006's total of $17 billion.
"Changes in the cost of debt and equity are having an impact on the commercial real estate investment market," explains David Arena, president of Grubb & Ellis New York. "Assets are being 're-priced' accordingly, driving cap rates up." Arena went on to note that rental rates, however, should remain steady over the next 12 to 18 months due primarily to the low vacancy, lack of new supply in the marketplace and the cost of bringing new developments to market. "If employment growth slows for a sustained period, we may see some softness around the edges--and demand for 'growth' space will diminish while tenants who occupy large blocks may consider partial sublets," he explains. "But New York is a terrific market with access to the best educated, most productive work force on the planet…I am bullish on its long-term health and vitality."
Arena says that for now, Grubb & Ellis is counseling clients to act with caution, but to be prepared to move quickly when opportunities arise. The report notes that tenants seemed to focus their activity in the third quarter on Midtown, despite the fact that asking rents have reached an all-time high. Most must decide between remaining in Midtown and absorbing a steep increase in real estate expenses or moving their operations to another part of the city. And for some--the rents are truly astounding--several transactions closed in the third quarter at rents starting as high as $180 per sf, the report explained.
But the perception that $100-plus-per-sf rent is the new norm is actually a fallacy, according to the report. A closer look at Midtown reveals many viable options in Midtown for tenants who cannot afford to triple their rent. In fact, according to Richard Persichetti, manager of research services for Grubb & Ellis New York says that "transactions starting at $100-plus per sf only accounted for 13% of the transactions completed in 2007." The bulk of the transactions in Midtown--62%--fell into the $35 to $75 per sf range, he adds.
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Natalie Dolce
Natalie Dolce, editor-in-chief of GlobeSt.com, is responsible for working with editorial staff, freelancers and senior management to help plan the overarching vision that encompasses GlobeSt.com, including short-term and long-term goals for the website, how content integrates through the company’s other product lines and the overall quality of content. Previously she served as national executive editor and editor of the West Coast region for GlobeSt.com and Real Estate Forum, and was responsible for coverage of news and information pertaining to that vital real estate region. Prior to moving out to the Southern California office, she was Northeast bureau chief, covering New York City for GlobeSt.com. Her background includes a stint at InStyle Magazine, and as managing editor with New York Press, an alternative weekly New York City paper. In her career, she has also covered a variety of beats for M magazine, Arthur Frommer's Budget Travel, FashionLedge.com, and Co-Ed magazine. Dolce has also freelanced for a number of publications, including MSNBC.com and Museums New York magazine.
