Jones Lang LaSalle Reports Flat New York Office Market in 1st Quarter of 2013

Lower Manhattan only submarket to post decrease in vacancy rates; Manhattan sees slight overall gains in rental rates

Lower Manhattan was the only submarket in New York to record a decrease in vacancy rates in the first quarter of the year. Of the top 10 leases signed in Manhattan over the past few months, four of them were for Downtown locations.

Downtown
While a burst of activity in Lower Manhattan helped push vacancy rates down in the first quarter of the year, that trend is not likely to last long. New availabilities at One World Trade Center — and space scheduled to return elsewhere in the market — will likely push vacancy higher in the spring.

Lower Manhattan posted large drops in Class A and overall vacancy rates in the first quarter of the year. The overall vacancy rate fell to 11.8 percent in the first quarter of 2013, a drop of 4.8 percent (or 0.6 percentage points) from the overall vacancy rate of 12.4 percent the previous quarter. The Class A vacancy rate slipped to 12.4 percent this quarter, a decrease of 13.3 percent (or 1.9 percentage points) from the Class A vacancy rate of 14.3 percent in the fourth quarter of 2012. Downtown’s Class B vacancy rate rose to 10.7 percent this quarter, an increase of 18.1 percent (or 1.6 percentage points) from the Class B vacancy rate of 9.1 percent in the final quarter of 2012.

“We remain bullish on Lower Manhattan, and believe the submarket remains a value play as demographics, the industry sectors occupying space Downtown, and commuting patterns of area workers continue to evolve,” said Peter Riguardi, president of JLL’s New York tri-state office. “While Downtown was the only submarket to record a drop in vacancy rates this quarter, that will not last. New space to be added to the market at One World Trade Center and 180 Maiden Lane will push rates higher this spring.”

While Downtown office buildings posted an increase in Class A rents, the submarket’s Class B product saw rents fall by a slight amount this quarter. Class A rents expanded to $52.44 per square foot in the first quarter of 2013, an increase of 2.2 percent from Class A rates of $51.31 per square foot the previous quarter. Lower Manhattan’s Class B rents fell to $35.70 per square foot this quarter, a decrease of less than 1.0 percent from Class B rates of $35.99 per square foot in the fourth quarter of 2012.

New York
As a whole, New York City continues to progress in its recovery from the recession, though ongoing corporate caution and some downsizing, especially in the financial services sector, hampered new lease commitments, added space to the availability supply and affected rents.

The city’s overall vacancy rate rose to 11.5 percent in the first quarter of 2013, an increase of 2.6 percent (or 0.3 percentage points) from the overall vacancy rate of 11.2 percent the previous quarter. The Class A vacancy rate grew slightly to 12.7 percent this quarter, an increase of less than 1.0 percent (or 0.1 percentage points) from the Class A vacancy rate of 12.6 percent in the fourth quarter of 2012. The Class B vacancy rate increased to 9.9 percent this quarter, a rise of 6.0 percent (or 0.5 percentage points) from the Class B vacancy rate of 9.4 percent in the final quarter of 2012.

An increase in average asking rental rates for the city’s Class A product helped offset a slight decrease in rents for Class B office space. Class A rents rose to $67.16 per square foot in the first quarter of 2013, and increase of 1.5 percent from Class A rates of $66.18 per square foot the previous quarter. The city’s Class B rents fell to $46.07 per square foot this quarter, a drop of 2.3 percent from Class B rates of $47.15 per square foot in the fourth quarter of 2012.

“Improving economic sentiment, including a rising Dow Jones Industrial Average and record corporate profits, did not result in improving numbers for the Manhattan commercial office market in the first quarter of 2013,” said Riguardi. “While touring activity has increased, new leases have been slow to materialize. Both large and small blocks of space were returned to the market at a faster pace than could be leased. The submarkets and buildings that saw strong activity this quarter were those that capitalized on the market’s focus on value.”

Midtown South
Midtown South saw vacancy rates increase by double digits in all property classes in the first quarter of the year. Although it remains the tightest submarket in Manhattan, the area posted an increase in vacancy rates this quarter, as large blocks of space in Hudson Square and smaller blocks in Chelsea became available. The fashion sector appears to have displaced technology firms as the most active industry in Midtown South.

“While Midtown South has positioned itself as a technology hub in recent years, luxury brands and retail have committed to some of the largest leases lately,” said Riguardi. “Boosted by improving consumer confidence, tourism and the Asian markets, luxury and retail have been one of the bright spots in the New York economy. Some of the large deals in Midtown South this past year were concluded by Tory Burch, Estée Lauder and Tiffany. This quarter, J. Crew recorded the largest lease with the expansion of its headquarters at 770 Broadway to 79,735 square feet, followed by Eileen Fisher which renewed and expanded to 62,000 square feet at 111 Fifth Avenue.”

The submarket’s overall vacancy rate rose to 8.6 percent in the first quarter of 2013, an increase of 19.5 percent (or 1.4 percentage points) from the overall vacancy rate of 7.2 percent the previous quarter. Much of the increase came from the Hudson Square and Chelsea submarkets. A rare large block became available at 395 Hudson Street on a sublease basis, which drove the Hudson Square vacancy rate from 8.2 percent at year-end 2012 to 10.6 percent at the end of the first quarter of 2013. Smaller blocks of space along lower Fifth Avenue caused the Chelsea vacancy rate to rise from 6.7 percent to 8.0 percent in the same time period.

The Class A vacancy rate grew to 11.2 percent this quarter, rising 17.0 percent (or 1.6 percentage points) from the Class A vacancy rate of 9.6 percent in the fourth quarter of 2012. Midtown South’s Class B vacancy rate increased to 7.8 percent this quarter, a boost of 20.8 percent (or 1.3 percentage points) from the Class B vacancy rate of 6.5 percent in the final quarter of 2013.

Midtown South recorded a slight drop in rents for all building classes this quarter as space became available in the less-expensive Hudson Square submarket. Class A rents fell to $69.33 per square foot in the first quarter of 2013, a drop of 1.2 percent from Class A rates of $70.15 per square foot the previous quarter. The submarket’s Class B rents slipped to $49.21 per square foot this quarter, a decrease of less than 1.0 percent from Class B rates of $49.45 per square foot in the fourth quarter of 2012.

Midtown
Midtown again presented a mixed picture this quarter, posting a slight increase in overall and Class A vacancy rates, while Class B buildings recorded a drop in vacancy rates. The Penn Station/Garment District submarket, however, has become one of the most active areas in Manhattan due to tenants moving north from Midtown South in search of better value and the overall strength of the textile/apparel industry. Although the Penn Station/Garment District represents just 16 percent of Midtown’s office inventory, it claimed one-third of all Midtown leases in the first quarter of the year.

Midtown’s overall vacancy rate rose to 12.1 percent in the first quarter of 2013, an increase of 3.0 percent (or 0.4 percentage points) from the overall vacancy rate of 11.7 percent the previous quarter. The boost in vacancy rates was primarily the result of the return of several large blocks of office space along the Avenue of the Americas to the market. The Class A vacancy rate rose to 12.9 percent this quarter, an increase of 5.3 percent (or 0.6 percentage points) from the Class A vacancy rate of 12.3 percent in the fourth quarter of 2012. The submarket’s Class B vacancy rate fell to 10.7 pecent this quarter, a drop of 1.6 percent (or 0.2 percentage points) from the Class B vacancy rate of 10.9 percent in the final quarter of 2012.

“Increased activity among midsize and smaller tenants — and those in industries outside financial services — should result in improved leasing volume and positive absorption in the second half of the year,” said Riguardi. “Continued weakness in large financial and legal services employment, compounded by advances in workplace efficiency, will temper net new demand — especially for large block, high-cost Midtown Class A product — over the near-term. Longer-term, both the City and Moody’s are forecasting positive employment growth in financial services in 2014 and 2015.”

Midtown posted little change in rents in the first quarter of the year, with a small boost in Class A rents offsetting a minor increase in Class B rates. Class A rents rose to $72.88 per square foot in the first quarter of 2013, an increase of less than 1 percent from Class A rates of $72.78 per square foot the previous quarter. Midtown’s Class B rents fell to $49.11 per square foot this quarter, a decrease of 2.1 percent from Class B rates of $50.14 per square foot in the fourth quarter of 2012.

JLL is a leader in the New York tri-state commercial real estate market, with more than 1,750 of the most recognized industry experts offering brokerage, capital markets, property/facilities management, consulting, and project and development services. In 2011, the New York tri-state team completed approximately 15.9 million square feet in lease transactions, arranged capital markets transactions valued at $1.57 billion, managed projects valued at more than $6.8 billion, and oversaw a property and facilities management portfolio of 63.6 million square feet and an agency leasing portfolio of 49.8 million square feet.

About Jones Lang LaSalle
Jones Lang LaSalle (NYSE:JLL) is a professional services and investment management firm offering specialized real estate services to clients seeking increased value by owning, occupying and investing in real estate. With annual revenue of $3.9 billion, Jones Lang LaSalle operates in 70 countries from more than 1,000 locations worldwide. On behalf of its clients, the firm provides management and real estate outsourcing services to a property portfolio of 2.6 billion square feet. Its investment management business, LaSalle Investment Management, has $47.0 billion of real estate assets under management. For further information, visit www.jll.com.

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