Brandl Frey - An update on the office leasing market in NYC: Seeing some of the strongest velocities in a decade

The Manhattan office market is seeing the strongest leasing velocity in over a decade. This increase in volume will lead to a decline in vacancy and an increase in rents. Interest in new development has been renewed for the first time in four years, and while the market currently appears to be in balance, the bias is shifting to landlords. During the first five months of 2011, slightly more than 14 million s/f of new leases were signed in the Manhattan office market according to Cushman & Wakefield. This is 35% greater than in the first five months of 2010 and on track for the strongest first two quarters of leasing since 1998. This year has been characterized by a number of large transactions topped by Conde Nast's lease of 1 million s/f at One World Trade Center. All totaled, there have been 22 lease transactions, new leases and renewals, of at least 100,000 s/f with an average size of 273,000 s/f. The main driver for all of this activity has been the unexpected strength of the New York City economy. New York survived the recession in better shape than almost every other metropolitan area in the nation and has recovered more rapidly. As of the beginning of second quarter, the unemployment rate in New York City was 8.6%, substantially below the national total of 9%. Since reaching a bottom in November 2009, payroll employment in New York City has increased by slightly more than 68,000 jobs, meaning the city has recovered nearly half of the 140,000 jobs that were lost in the recession. A far better performance than the rest of the nation, where roughly 20% of the jobs lost in the recession have been recovered. As employment has increased in New York, it has boosted leasing thus pushing the vacancy rate down. It will be interesting to see how the balance of the year unfolds; Wall Street is predicting major layoffs in the fall as a result of the industry shifting and potentially eliminating many trading related jobs. Manhattan's three markets, Midtown, Midtown South and Downtown behaved very differently during the recession and the recovery. Much of the increase in vacancy that occurred in the recession was centered in Midtown where large financial firms that came under stress during the recession were located. But Midtown, the largest market in Manhattan, has also recovered the most quickly. The Midtown vacancy rate, which peaked at 12.6% in March 2010, is currently 10.3%. Midtown South, made up primarily of smaller and older buildings, was less impacted by the recession. Catering more to creative firms in the technology, fashion and advertising industries, the vacancy rate only reached 10.1% at its peak. Today the Midtown South vacancy rate is 7.6%, the lowest in the nation. The Downtown market reached its peak vacancy rate in late 2010 at 12.1%, but it has also already declined to 10.3% as of May. The shift in vacancy over the past year from rising to falling has begun to have an impact on rents. Typically rents do not begin to increase until the vacancy rate has been declining for some time and landlords are convinced that the market is moving in their favor. That began to occur in the fourth quarter of 2010, roughly six months after the vacancy rate peaked. According to Cushman & Wakefield, asking rents on available space currently average $55.29 per s/f, up 1.7% since the end of the year, and 2.8% since reaching a bottom in October 2010. There are many uncertainties facing the global and local economies. But if the U.S. economy continues to grow and New York City continues to outperform the rest of the nation, the Manhattan office market could continue to experience declining vacancy rates and rising rents through the balance of 2011 and beyond. Brandl Frey is a leasing manager at The Durst Organization, Inc., New York, N.Y.