Colliers Q3 Report: Positive momentum drives Manhattan office market towards pre-recession health

The Manhattan office market showcased a frothy third quarter, with Midtown North, Midtown South, and Downtown all registering recovery from Great Recession lows to varying degrees, according to new research from Colliers International. New construction in Lower Manhattan and along the Far West Side continue to attract tenants, with the TAMI sector still one of the market's key drivers of activity. The Manhattan office market experienced an exceptionally strong third quarter. Leasing activity was 8.3 million s/f, 4.2% higher than the 8.0 million s/f last quarter and 31.3% more than the 6.3 million s/f a year ago. Year-to-date leasing of 28.1 million s/f is a 35.2% increase over the 20.8 million s/f from the first nine months of 2013. At 10.2% the overall availability rate was down from 11.0% last quarter and from 11.9% a year ago — while also achieving its lowest rate since 10.1% in the fourth quarter of 2008. Meanwhile, the overall average asking rent increased to $65.97/sf, up 2.3% from $64.46/sf last quarter and 10% higher than the $59.98/sf achieved a year ago. MIDTOWN NORTH Midtown North recorded 3.3 million s/f of leasing activity, down 17.5% from 4 million s/f last quarter, but better than the 3.1 million s/f leased in a year ago. Year-to-date leasing of 11.9 million s/f is 9.8% greater than the 10.8 million s/f recorded during the first nine months of 2013. The overall Midtown North availability rate decreased to 10.6%, down from 11.4% last quarter and from 11.6% a year ago. The current rate is also its lowest since the third quarter of 2008 and down 25% from the Great Recession high of 14.1% set in the fourth quarter of 2009. Midtown North absorption was positive at 1.9 million s/f, more than double the positive 903,000 s/f last quarter, 24% ahead of the positive 1.5 million s/f a year ago, and marked the strongest level since second quarter 2010. Representing the sixth consecutive quarter of increases, Midtown North average asking rent reached $75.74/ sf, a 2.0% rise from $74.29/sf last quarter, and 9.7% higher than the $69.03/sf a year ago. Average asking rents are now at their highest quarterly average since $85.76/sf in the fourth quarter of 2008, but still 17.7% below the all-time quarterly high of $92.04/sf set during the third quarter of 2008. MIDTOWN SOUTH Recently renovated or repositioned buildings continue to attract tenants in Midtown South, with TAMI sector companies continuing to lead the market. Overall leasing reached 2.9 million s/f this quarter, up 48.0% up from the 2.0 million s/f achieved both last quarter and a year ago. Midtown South registered 9.8 million s/f of leasing since January, 57.6% higher than the comparable period in 2013, with nine-month leasing the highest level achieved since 2005. The Midtown South overall availability rate was 8.5%, down from 8.9% last quarter and from 9.7% rate a year ago. The current availability rate now matches that from the fourth quarter of 2008, but has not yet achieved the pre-recession low of 7.1% recorded in the second quarter of 2008. Midtown South recorded 772,000 s/f of positive absorption, a reversal from the negative 163,000 s/f last quarter, and well ahead of the positive 38,000 s/f recorded a year ago. Year-to-date positive absorption of 2.1 million s/f completely erased the 1.9 million s/f of negative absorption from the first three quarters of 2013. Marking the 15th consecutive quarter with average asking rent increases, Midtown South reached $58.19/sf, up 3.0% from $56.47/sf last quarter, up 9.3% from $53.23/sf a year ago, and nearing the highest level ever recorded — $61.60/sf — in the first quarter of 2008. DOWNTOWN Downtown continues to attract new tenants from various industry sectors, registering 2.1 million s/f of leasing in the third quarter, up 4.9% from 2.0 million the previous quarter and up 70% from the 1.2 million s/f a year ago. Year-to-date leasing of 6.5 million s/f is 71% higher than the 3.8 million s/f from the comparable period in 2013, represents the highest level of leasing activity recorded Downtown since its 8.4 million s/f during the first nine months of 2000, and has now surpassed the pre-recession level of 5.8 million s/f from the first three quarters of 2008. Inventory decreased with the availability rate declining to 12.2%, down from 13.3% last quarter and from 15.9% a year ago. In the fifth straight quarter of declining availability, Downtown reached its lowest level since its 11.5% in the fourth quarter of 2009, although higher than its 2008 pre-recession low of 7.6%. Positive absorption this quarter was 1.3 million s/f, 6.1% ahead of last quarter's 1.2 million s/f, 5.0% stronger than a year ago, and the strongest quarter since its 1.7 million s/f in the second quarter of 2011. Year-to-date positive absorption of 3.7 million s/f is also a significant improvement over the negative 526,000 s/f recorded during the first nine months of 2013. Average asking rents continue to rise Downtown as landlords are encouraged by sustained leasing activity, new office and retail construction, long awaited transportation infrastructure improvements, and a growing residential population. Upward re-pricing by landlords and the removal of lower-priced blocks of space drove average asking rents to $51.70/sf, up 5.6% from $48.96/sf last quarter, and up 8.9% from $47.48/sf a year ago. Even more significantly, these asking rents are the highest ever recorded Downtown. "The Manhattan office market is experiencing across-the-board gains in most of the key fundamentals, in some cases even surpassing pre-recession peak performances," said Joseph Harbert, President of the Eastern Region for Colliers International. "We are on pace for a stellar 2014, with Midtown South and Downtown continuing to lead the way, and an increasing impact of future deliveries coming along the Far West Side." Additional highlights from Colliers International's' second quarter report: Several large blocks of older building stock are expected to become available in Midtown North over the next few years when large tenants vacate 2.3 million s/f on the east side and 2.1 million s/f in the Sixth Avenue corridor in committed relocations. Midtown South's recovery from the Great Recession has been extensive across all three building classes: Class A asking rent is now $66.03/sf, a 1.7% decrease from $67.16/sf the prior quarter, but 3.6% higher than the $63.75/ sf a year ago. Class B asking rents have increased to $61.05/sf and Class C increased to $50.05/sf, both eclipsing their 2008 pre-recession highs. Of the ten largest leases signed during the first three quarters of 2014, half (1.6 million s/f) are with tenants relocating Downtown (three from Midtown North and two from Midtown South). Downtown's appeal now extends beyond the traditional financial services, government, and legal tenants.