"The low level of available space is due to a lack of new supply in the Manhattan office market," noted Joseph Harbert, COO of the New York Metro Region for Cushman & Wakefield at the presentation. "Though many projects have been announced, and are either in the beginning stages or under construction, relatively little has been added to the market in the past 10 years."
Harbert and industry experts in the audience explained that their predictions as far as Q1 '08 goes are relatively fine, with carryover deals expected to close, however they are "waiting for the shoe to drop," and are relatively uncertain about how Q2 '08 will pan out. According to Harbert, little reprieve is forecasted for the next several years. Manhattan's office space inventory totals 390.6 million sf, and in the next three years minimal new construction will come on the market. "Considering that more than 15 million sf was leased in Midtown Manhattan alone this year, the seven million sf being added to the market in the next three years will do little to ease Manhattan's space shortage," Harbert explained.
As a result of declining supply, overall asking rents for Manhattan office space reached new highs in 2007. By year-end, average asking rents had increased 28.7% from the end of 2006, reaching $65.08 per sf. During the last three months of 2007, slightly more than five million sf of office space was leased in Manhattan, less than in each of the previous three quarters. Overall, leasing for all of 2007 was down 12.8% from 2006, measuring about 23.6 million sf. Though many are quick to blame this slowdown on financial uncertainty caused by the credit crisis, other major factors come into play, Harbert explained. "Record asking rents and decreasing available space have given prospective tenants fewer options from which to choose."
A slow quarter of leasing activity kept Manhattan's overall vacancy rate steady from the previous quarter, finishing year-end at 5.7%, one percentage point less than 6.7% at the end of 2006. The overall sublease vacancy rate fell below 1% for the first time in seven years, reaching 0.9% at the end of 2007.
Downtown's vacancy rate declined to 6.2%, after falling below 7% at midyear 2007. The class A vacancy rate Downtown declined to 5%, from 6.9% at this time last year. "There's a tremendous amount of energy Downtown right now," Harbert noted. "We expect that to continue into 2008 and beyond."
As far as investment sales goes, more than $47.8 billion in sales here closed during 2007, up nearly 40% from the $34.7 billion closed in 2006. "There was a record level of activity in the first six months of the year," Harbert noted. "But even after the summer's credit crisis and the following financial uncertainty, transactions continue to close. The difference is that we're seeing a shift in the players winning deals as tightening lending standards have required more equity."
Of the more than $2.6 billion in sales currently under contract, foreign buyers account for 33% and institutional investors and pension funds account for 24%. Private equity, which had fueled 65% of the sales closed in 2007, only account for 23% of sales under contract at the close of 2007.
There continues to be abundant capital seeking quality Manhattan properties, Harbert explained. Four large properties sold in Q4 '07, ranging from $525 million to $1.6 billion, and were purchased by a combination of foreign and institutional capital sources. Though Harbert noted that 2008 may not see the same volume as 2007, new offerings are expected to hit the market in the beginning of this year. "Manhattan's office leasing fundamentals are undeniably strong," Harbert said, "which makes Manhattan office buildings an attractive investment."
In the retail sector, despite concerns about retail sales and consumer confidence, the Manhattan retail market continued to thrive in 2007. "The Manhattan retail market has operated in a vacuum," Harbert explained. At year-end, Manhattan retail rental rates escalated to new heights in all submarkets. Retail rents for prime spaces, which posses both location and branding, set records, and Harbert noted the trend is expected to continue. "We've seen particular markets--including Times Square, 34th Street, Fifth Avenue and Soho--that are rapidly escalating in terms of rents," Harbert said.
Rents on Madison Avenue, one of Manhattan's priciest corridors, increased more than 14%, from $954 to $1,091 per sf at the end of 2007. On the Upper West Side, rents also rose about 14% year-over-year; ending 2007 at $336 per sf. Harbert does not expect activity to slow in the first half of the year.
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Natalie Dolce
Natalie Dolce, editor-in-chief of GlobeSt.com and GlobeSt. Real Estate Forum, 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.
