Colliers Q3 Report: Manhattan Office Market Normalizes
--Leasing, investment sales fall off from second quarter boom; healthcare, tech, professional, business services remain drivers of activity--
NEW YORK, SEPTEMBER 30, 2013 – After a blistering second quarter, the Manhattan office market returned to a more normalized pace of activity in the third quarter, with overall indicators pointing to slow but steady improvements as we move toward the end of the year, according to new research from Colliers International.
The leasing market showed continued strength in healthcare, technology, professional, and business services, buoyed by an overall improving employment sector, although the pace of large lease and investment sales activity slowed over the past few months.
The overall Manhattan availability rate dropped to 11.5 percent, down from 12.1 percent inthe second quarter, its lowest level since late 2011. All three of Manhattan’s markets participated in the decline.
In Midtown North, the overall availability rate declined to 11.6 percent, down from 12.3 percent in the second quarter and 12.6 percent in the first quarter. Midtown South came in at 9.1 percent, down slightly from 9.2 percent in the second quarter, while Downtown declined to 14.7 percent, down from 15.9 percent.
The overall Manhattan vacancy rate also declined, falling to 6.2 percent, down from 6.4 percent in the second quarter. At 6.2 percent it is still modestly above the average of 6.0 percent recorded in 2012 and the first quarter of 2013.
In short, the overall Manhattan occupancy level for office space has increased during the last two quarters, and appears to be escaping from the doldrums recorded in the latter half of 2012 and the first quarter of 2013.
After remaining virtually unchanged over the past 18 months, the overall average asking rents improved, reaching $59.14/sf, up 4.5 percent from $56.61/sf in the second quarter. This strong gain largely resulted from substantial increases at buildings that have been newly re-introduced to the market after major upgrades, or have specialized uses or highly sought-after locations. Additionally, sublease space now only represents 15.2 percent of the total available space, compared with 15.6 percent in the previous quarter.
Average Midtown North asking rents reached $69.36/sf, up 4.9 percent from $66.09/sf in the second quarter. Rent gains occurred in all of the market’s major submarkets. Plaza District Class A space recorded an average asking rent of $77.59/sf, up 3.4 percent from the second quarter.
Gains were more modest in Midtown South (3.0 percent) and Downtown (2.8 percent), but on an annualized basis they were quite significant, nearly 12 percent. Midtown South’s average asking rent registered $53.08/sf, and Downtown’s was $47.48/sf.
“After the second quarter’s blow-out performance with 9.6 million square feet of completed transactions, it was widely expected that the pace of leasing would slow in the third quarter, which it did,” said Joseph Harbert, President of the Eastern Region for Colliers International. “However, at 6.3 million square feet, the level of leasing activity was well within the normal range. Moreover, there are indications that other large leases are very close to signing.”
Third quarter leasing was active in all three Manhattan markets, and the large majority of deals involved new space for the tenant:
- Almost 3 million square feet was leased in Midtown North, with just 26 percent of these transactions representing renewals.
- Midtown South was also active, at 1.9 million square feet. The percentage of renewals was even lower, at only 6.1 percent.
- Finally, Downtown recorded slightly less than 1.2 million square feet of leasing; 16.8 percent were renewals.
Measured against the total amount of space in each market, the Penn Plaza/Garment district in Midtown South and the Plaza District in the Midtown North market were the most active submarkets in the third quarter.
Investment Sales Pricing Holds Up
Including the impending sales of 650 Madison Avenue and 200 Lafayette Street, the average third quarter sales price was $945/sf. This brings the 2013 year-to-date average price to $911/sf, which is above the peak levels reached in the pre-recession years of 2007/08 when it ranged from $777/sf to $842/sf.
Total dollar volume of sales dropped to $2.3 billion, down 50 percent from $4.7 billion in the second quarter. However, close to $5.5 billion of transactions are under contract and likely to close before the end of 2013.
For much of the third quarter, the expectation was that the Federal Reserve’s policy of driving longer term interest rates lower though purchases of securities would wind down. This change in capital market perceptions drove long term interest rates higher and may have made it more difficult to obtain financing. In late September, however, the Fed announced that it was not reducing its pace of bond purchases. This action lowered rates somewhat and firmed expectations that capital would remain available. As a result, sales activity in the fourth quarter should be robust.
City’s Economy Evolves, Grows
Through August, total New York City employment was growing at a 1.9 percent annual rate, substantially faster than the U.S. as a whole, which registered 1.4 percent.
The City’s traditional drivers of growth, however, were still lagging. For example, the entire financial sector actually suffered a decline in employment through the first eight months compared to the same period in 2012. Total financial sector employment is still 6.2 percent below the pre-recession peak.
Meanwhile, healthcare, technology, professional, and business services continue to drive demand for space as their employment levels grow. These sectors are giving a new face and substance to the New York City economy.
ABOUT COLLIERS INTERNATIONAL
Colliers International is a global leader in commercial real estate services, with over 13,500 professionals operating out of more than 482 offices in 62 countries. A subsidiary of FirstService Corporation, Colliers International delivers a full range of services to real estate users, owners and investors worldwide, including global corporate solutions, brokerage, property and asset management, hotel investment sales and consulting, valuation, consulting and appraisal services, mortgage banking and insightful research. The latest annual survey by the Lipsey Company ranked Colliers International as the second-most recognized commercial real estate firm in the world.
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