Downtown Manhattan continued to drive the city's CRE activity at the start of the year, with the submarket far outpacing Gotham's other areas on leasing, according to CBRE, which held a media briefing on first quarter results on Wednesday. Midtown South, meanwhile, may be starting to cool down, with a decline in leasing, particularly in terms of new agreements versus renewals.

Drivers of activity throughout Manhattan were clear, with 44% of office leasing velocity having been generated by three business sectors: financial services, 24%, retail, 12%, and law, 8%.

Prices across the city, though, are “continuing to move up,” said Kyle Schoppmann, senior managing director. Average asking rents increased in all three markets year-over-year, with Midtown South reaching a new all-time high of $60.10.” Surpassing the $60 mark is significant, she noted. That high price is leading, in part, to Downtown's surge, added Peter Turchin, EVP.

“Companies like Google are pricing start-ups out of the market, and leaving other firms with less product at a good price, so they're heading to areas like Downtown,” he said. The healthy quarter for Lower Manhattan was driven partly by HarperCollins Publishing Inc.'s 181,000-square-foot relocation to 195 Broadway, the largest new lease completed in all of Manhattan during that time.

Downtown leasing activity increased to 1.37 million square feet from just under a million a year ago, according to CBRE, with absorption at positive 280,000 square feet—compared to last year's negative 110,000 square feet—and availability dropping to 13.9% from 14.2% in the fourth quarter of 2012. The first quarter's top five deals in the Downtown marker were relocations, rather than renewals, Turchin noted.

“I think you have a truly strong market when all three prime indicators, leasing activity, absorption and availability rate, are trending positively at the same time,” said Turchin.

Above-average leasing, along with a handful of space withdrawals, counterbalanced new availabilities brought to market during the quarter, creating positive absorption and a 30-basis-point drop in the overall availability rate, CBRE's report noted. The sublease availability rate rose 10 basis points during the quarter to 1.6%. Downtown's average asking rent was virtually unchanged from the previous quarter.

Some surprises came to Midtown South. Leasing activity fell by 9% to 890,000 square feet, marking the first time since Q3 of 2010 that such movement dropped below the historical average. Renewals, as well as renewals with expansions, were the name of the game. In fact, Schoppmann noted, the quarter's three biggest deals—Deutsch, Inc. at 111 8th Ave., J.Crew at 770 Broadway and clothier Eileen Fisher at 111 Fifth Ave.—were all renewals. However, several large availabilities offset the below-average leasing, leading to 1.51 million square feet of negative net absorption and a 210-basis-point jump in the availability rate. Year-over-year, Midtown South's average asking rent was up 23%, or $11.31 per square foot.

Also of note was a change in the price differential between Midtown South and Midtown, Schopmann noted. “The spread is shrinking,” she said. At quarter's end, the average asking rent in Midtown South represented 87% of Midtown's average asking rent—a historically tight spread.

The Midtown market saw a precipitous dip. At 2.7 million square feet, leasing activity slipped 16% below the five-year quarterly average of 3.43 million square feet and 11% below the previous quarter's 3.22 million sqare feet. Leasing activity was dominated by renewals, and no new space commitment for more than 100,000 square feet was done during the quarter. New availabilities offset the quarter's below-average leasing though, resulting in 1 million square feet of negative net absorption, according to CBRE. That number is a move in the right direction: in 2012's first quarter, Midtown logged 2.09 million square feet of negative absorption.

The overall availability rate jumped 40 basis points during the quarter to 12.4%. At the same time last year, the availability rate was 50 basis points lower, the research shows. Midtown's average asking rent rose 3%, or $1.78, during the quarter to $69.58 per-square-foot. The increase was due largely to the pricing of high-end available space that had previously been marketed without a published asking rent, CBRE's report states.

On the bright side, “the good news in midtown is that the sublease market is staying in check,” notes Turchin.

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Rayna Katz

Rayna Katz is a seasoned business journalist whose extensive experience includes coverage of the lodging sector, travel and the culinary space. She was most recently content director for a business-to-business publisher, overseeing four publications. While at Meeting News, a travel trade publication, she received a Best Reporting award for a story on meeting cancellations in New Orleans during Hurricane Katrina.