Colliers Q3 report: Manhattan office market performance indicates market shift

Pointing to a shift in the local office market, Midtown South has emerged as such a leasing juggernaut that some areas of Midtown North are now seen as relative bargains by comparison, according to new research from Colliers International. In fact, bidding wars for Midtown South office space have become the norm, with Midtown North landlords again trying to finalize deals where they can, becoming more flexible both with lease terms and concessions, especially for digital, media, and information technology tenants who may be frozen out of Midtown South. Buoyed by an improving and diversified employment sector, Manhattan recorded modest third quarter office leasing, with an uptick in legal services activity and continued strength in the business services, communications, and media sectors. The financial sector also showed solid activity, but was still well below its historical levels. Total third quarter Manhattan leasing registered 6 million s/f, down from 7.4 million s/f in the second quarter and flat year-over-year. Microsoft's 400,000 s/f lease at 11 Times Sq.was the quarter's largest transaction. 80% of all third-quarter leasing was the result of direct deals, whereas renewals made up 49% and 32% of all leasing, respectively, over the previous two quarters. Overall local average asking rents in the third quarter decreased to $56.44 per s/f, down slightly from $56.99 per s/f the previous quarter but up 4.8% from $53.88 per s/f a year ago. Meanwhile, the overall third quarter availability rate was 11.5%, down from 11.8% the previous quarter and up slightly from 11.4% a year ago. The large disparity between the overall availability rate and the overall vacancy rate continued, with the vacancy rate at 5.9%. However, it should be noted that this disconnect is due primarily to the large amount of new construction Downtown. "The overall Manhattan office market has seen a change that even just a few short years ago would have seemed implausible," said Joseph Harbert, president of Colliers International's Eastern Region. "The demand for Midtown South office space, particularly from technology companies, continues to surge, with little space available for immediate occupancy. Substantial amounts of new building stock becoming available is years in the future. For the near future at least, we are operating in a new office market." Additional highlights from Colliers International's 2012 third quarter analysis: Average asking rents in Midtown North declined to $67.89 per s/f, down from $69.18 per s/f in the second quarter, with the biggest give back seen in Plaza District class A space, where average asking rents dropped to $79.28 per s/f, down 3.2% from $81.87 per s/f in the second quarter, but still up 1.9% from $77.77 per s/f a year ago. The third quarter availability rate was flat quarter-over-quarter, at 11.9%, and up from 11.3% a year ago. Midtown North continued to show a large gap between its availability rate and vacancy rate, with the vacancy rate at 6.9% for the second consecutive quarter. Midtown South continued its powerful transformation, demonstrated by its market-low 4% vacancy rate for the second consecutive quarter (down from 4.7% a year ago), and by its 8% availability rate, down from 8.4% in the second quarter and 8.8% a year ago. The average asking rent was $47.19 per s/f, up 7.6% from its $43.86 per s/f in the second quarter and up 16.7% from its $40.44 per s/f a year ago. There is such demand to either relocate to or renew in Midtown South that Chelsea and the Flatiron/Madison Square Park submarkets are now consistently drawing asking rents for class A space in excess of $60 per s/f and in some cases more than $70 per s/f. That intense escalation has priced out several tenants, who have already moved or are considering a migration to the Grand Central, Downtown, or Brooklyn markets. The Downtown market was essentially flat at the end of the third quarter from the second quarter levels. Average asking rents showed a decrease to $45.74 per s/f, down slightly from $45.97 per s/f in the second quarter, and virtually flat from last year's $45.50 per s/f. The availability rate was 16.1%, down from 16.6% the previous quarter, but up slightly from 15.9% from last year's levels. Meanwhile, the third quarter vacancy rate was 6.7%, up from 6% in the second quarter and unchanged from the year earlier level. Colliers International is the third-largest commercial real estate services company in the world, with over 12,300 professionals operating out of more than 520 offices in 62 countries. 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