Bolstered by a stronger-than-expected recovery in hiring, office fundamentals in New York City continue to recover rapidly, according to Cushman & Wakefield. In fact, by some metrics, the market is stronger than it’s ever been.
Asking rents for Manhattan office space reached $58.90 at the end of March, a 7.6 percent increase year-over-year. The three major submarkets—Midtown, Midtown South and Downtown—saw increases of 1.9 percent, 5.6 percent and 0.8 percent over the last quarter. Rents are up even though leasing activity slowed a bit in the first quarter. In all, 5.8 million sq. ft. in new leases were signed, 24 percent less than the 7.6 million sq. ft. in new leases signed in the first quarter of 2011. The drop comes following a year in which leasing volume overall reached 30.1 million sq. ft.—the highest total since 2000. But it is roughly in line with the 10-year quarterly average of 5.9 million sq. ft.
As a result, the vacancy rate at the end of the first quarter was 9.1 percent, down from 10.0 percent a year ago. For class-A space, the vacancy rate stood at 10.1 percent with average asking rents of $67.30 per sq. ft. Vacancies declined 0.6 percent year-over-year.
“We have a market that is close to equilibrium,” says Joe Harbart, COO of the New York Metro Region for Cushman & Wakefield. “We’re about at the spot where we are switching to a landlord’s market instead of tenant’s market.”
The most significant factor contributing to the results was the fact that, according to figures revised by the U.S. Labor Department, the city saw 71,900 in new jobs in 2011—nearly double the previous estimate of 37,400 jobs. In fact, the total employment numbers reached 3.84 million—a new high for the city beating the previous record of 3.83 million in 1969. Ken McCarthy, senior economist and senior managing director with Cushman & Wakefield sees that robust pace of growth continuing and is projecting that another 93,000 jobs will be added in 2012 and 77,300 in 2013.
In fact, New York is just one of three metros in the U.S.—Washington D.C. and Houston are the others—where employment has surpassed the pre-recession peaks. The strength comes in spite of the fact that the financial sector has not expanded of late. Instead, information/media firms and professional services firms are driving much of the growth.
Going forward, that will just make the race for space in the city even more heated given that the overall supply of office buildings is not changing much. Since 1990, the amount of office space in the city has moderated between 390 million sq. ft. and 400 million sq. ft. Even with the addition of the new World Trade Center, the market will stand at 400 million sq. ft. in 2014. In that context, Cushman & Wakefield expects the office vacancy rate to drop to about 8 percent in the next two years, which will push rents higher.
In terms of leasing activity, 2011 was marked by a record number of leases of 100,000 sq. ft. or more. In all, Cushman & Wakefield counted 51 such deals. Another 13 have been signed so far in 2012, although the firm expects the pace to drop some as the year progresses. But there remains robust activity on leases between 10,000 sq. ft. and 25,000 sq. ft. In 2011, deals of that size accounted for 21.1 percent of market activity. In 2012, so far, they have accounted for 32.7 percent.
Performance across sub-markets
By sub-market, Midtown South led the way with a 5.9 percent vacancy rate. The vacancy rate downtown stood at 9.2 percent and for Midtown at 9.9 percent.
Midtown South boasts the lowest vacancy rate of any CBD in the country. Its class-A vacancy rate is 5.4 percent and rents have risen year-over-year from $57.44 per sq. ft. to $67.52 per sq. ft. The rent is just $4.56 per sq. ft. lower than class-A asking rents in Midtown—the tightest spread ever between the two sub-markets.
The numbers are evidence that “now people look at Manhattan as a single market,” Harbart says. “If a company is looking at space, they are not just looking at Midtown or Downtown. They now embrace the city as one market.”
Downtown, the vacancy rate fell from 9.5 percent in the fourth quarter. Asking rents increased to $40.37 per sq. ft., up 1.2 percent from the fourth quarter. In Midtown, meanwhile, asking rents ended the quarter at $66.70 per sq. ft., up 2 percent from the fourth quarter.
For the top space in the city, there are deals reaching more than $100 per sq. ft. in rent, according to Harbart, although the pace of those deals this year is a bit lower than last year so far. But there have been upticks in deals in the $80-to-$90-per-sq.-ft. and $90-to-$100-per-sq.-ft. ranges.