Colliers Q3 Report: Manhattan Office Market registers solid fundamentals with eye on year-end leasing boost

NEW YORK, NY The overall Manhattan office market continued its streak of solid quarters, with increasing asking rents, a decline in availability, and more than 100,000 leases recorded Downtown than in the previous two quarters combined, according to new research from Colliers International. There was an expected post-summer drop-off in overall Manhattan leasing velocity, with the third quarter not quite reaching the high notes of last year, although the market is likely poised for a more robust fourth quarter as pending leases and investments sales get closer to being finalized in advance of the year’s end. Overall Manhattan leasing activity for the third quarter of 2015 was 7.1 million s/f — down 12.8% from approximately 8.1 million s/f in the second quarter — and 14.1% below the 8.2 million s/f a year ago. Activity was 2.4% below the ten-year rolling average (7.2 million s/f), the first time of below-average leasing activity since 2013, although Manhattan’s overall quarterly leasing has been above the ten-year rolling average for eight of the 10 last quarters. But the market continued to tighten. At 9.7% — the lowest the overall Manhattan availability rate has been since the third quarter of 2008 — the rate was down 40 basis points (bps) from 10.1% last quarter and down 50 bps from 10.2% a year ago. Meanwhile, overall Manhattan absorption was positive 2.3 million s/f in the third quarter, increasing year-to-date absorption from positive 1.5 million s/f at the end of the second quarter to positive 3.7 million s/f at the end of the third quarter. Although down from 7.3 million s/f of positive overall Manhattan absorption through the first three quarters of 2014, the current level reflects a continued demand for space, with TAMI firms accounting for 34% of all third quarter leasing. As an additional sign of market tightening, at $70.25 per s/f the overall Manhattan asking rent surpassed $70 per s/f for the first time since 2008 and represented the tenth consecutive quarter of rising rents. The current rate is also 2.6% higher than the $68.47 per s/f last quarter and 6.5 percent above the $65.97 per s/f achieved a year ago. “The Manhattan office market continues to perform well, backed by a strong local economy, a desire for talented employees to live, work, and play here, and international investors who still see New York as a safe haven and a relative bargain on a global scale,” said Joseph Harbert, Eastern Region president for Colliers International. “Asking rents have set records yet again, putting pressure on tenants, and availability rates continue to fall, with several significant transactions in the pipeline we anticipate will close by end of the year. We have every reason to believe that New York will continue this solid pace through the end of the year and into 2016.” MIDTOWN Midtown registered 3.32 million s/f of leasing in the third quarter, down 22.9% from the 4.31 million s/f last quarter, but still up slightly from the 3.30 million s/f a year ago. And while Midtown quarterly leasing has been above the ten-year rolling average of 3.71 million s/f for seven of the 10 last quarters, leasing activity in the third quarter of 2015 was 10.4% below average, the first time of below-average leasing activity since the third quarter of 2014. At 9.6%, the availability rate was 50 bps below the 10.1% last quarter and 100 bps below the 10.6 percent a year ago, while also achieving its lowest level since the third quarter of 2008. Although several large blocks of new space listed during the quarter, absorption was still positive at 1.1 million s/f, although it was down considerably from the positive 2.2 million s/f the previous quarter and positive 1.9 million s/f a year ago. Midtown also saw average asking rents rise to $79.57/s/f, up 2.1% from $77.93/s/f in the second quarter and up 5.1% from $75.74 s/f a year ago. At $82.24/s/f, the class A average rose 2.5%, up from $80.23 per s/f the previous quarter, while for the second consecutive quarter remaining above $80.00 per s/f, a level that had not been reached since 2008. MIDTOWN SOUTH Midtown South continued its run as one of the country’s tightest markets. While leasing activity was 2.3 million s/f, down 22% from 3.0 million s/f the previous quarter, and 19.7% from 2.9 million s/f a year ago, leasing was 14.1% above the rolling ten-year average of 2 million s/f, the eighth consecutive above-average quarter, and the ninth time in the last 10 last quarters. In addition, the overall asking rent hit another all-time high — $65.32 per s/f — breaking the record set last quarter and marking the 19th consecutive quarterly increase. Repricing of existing blocks of space and newly listed large blocks with above-average asking rents contributed to the record-breaking level, which was up 12.3% from $58.19 per s/f a year ago. And though down 59.5% from the 0.77 million s/f of positive absorption year-over-year, the third quarter tally of 0.3 million s/f marked Midtown South’s fifth consecutive quarter of positive absorption, extending its longest continued period of positive absorption since 2010-2011. As a consequence, the Midtown South availability rate was 7.4%, down 20 bps from 7.6% the previous quarter and down 110 bps from 8.5% a year ago, lower than at any point since 2008. DOWNTOWN Downtown recorded the strongest quarterly improvements among the major submarkets, with three separate leases exceeding 100,000 s/f: KCG Holdings, Inc. (169,000-s/f at 300 Vesey St.; New York City Department of City Planning (115,000 s/f at 120 Broadway) and; Ironshore Inc. (102,000 s/f at 28 Liberty St.). These large leases helped propel overall activity to 1.4 million s/f, up more than 75% from .8 million s/f last quarter, reversing a two-quarter trend of leasing below 1 million s/f. However, Downtown leasing was 5.1% below the rolling ten-year average of 1.5 million s/f, the third consecutive quarter of below-average activity, and the fifth time over the last ten quarters. Meanwhile, the average asking rent was $57.13/s/f — another all-time high — up 3.7 percent from $55.07/s/f the previous quarter, and up 10.5 percent from $51.70/s/f a year ago. The Downtown availability rate decreased 80 bps to 13.3 percent, down from 14.1 percent from last quarter. Absorption was positive 0.87 million s/f, nearly double the 0.48 million s/f recorded the previous quarter, although year-to-date it is still negative at 0.50 million s/f. CAPITAL MARKETS Sales volume for the year is approaching record levels. Nearly $22 billion in property trades have closed year-to-date, with $8 billion under contract and another $7 billion being listed for sale. The prior peak occurred in 2007, which registered more than $30 billion in office trades. In addition to Blackstone acquiring the $3.9 billion, five-building RXR portfolio, the largest single-property trades included: 11 Madison Avenue ($2.58 billion; $1,100/s/f); office condo at 229 West 43rd Street ($516 million; $1,073/s/f) and; 575 Lexington Avenue ($510 million: $685/s/f). Pricing for Manhattan office building sales reached $937/s/f, another record level. Additional highlights from Colliers International’s 2015 third quarter Manhattan analysis: · FIRE sector tenants dominated both Midtown and Downtown, accounting for 46 percent and 43 percent, respectively, of all leased space. · All three building classes in Midtown posted increases to their average asking rents. · At $77.52/s/f — up $9.01/s/f from $68.51/s/f the previous quarter — Soho posted the largest quarterly gain in average asking rent of any Manhattan submarket. · FiDi led Downtown — for the fourth consecutive quarter — with 0.71 million s/f leased. · Foreign investors have accounted for $5 billion of direct Manhattan property acquisitions year-to-date, and nearly 25 percent of all purchases.