The 352-million-square-foot general purpose, multi-tenant Manhattan office market remained strong in the second quarter of 2012, with the second lowest vacancy rate and the second highest rent gain among the top Reis markets. By the second quarter the number of office-based jobs in New York City had finally surpassed the level of year-end 2000 according to Moody’s Economy.com, and was closing in on the year-end 2007 peak, and yet the amount of multi-tenant Manhattan office space is slightly lower than in 2007 and far lower than in 1999. The result is a strong market.
The vacancy rate is 10.2% as of the second quarter of 2012 according to Reis, down 20 basis points from the prior quarter and 60 from a year earlier. The year-end rate had fallen below 10.0% in the late 1990s and in mid-2000s, but since the early 1990s it has been no higher than the 11.6% recorded for 2009. The Class A vacancy rate of 10.1% is down 30 basis points for the quarter and 90 from a year earlier. The 10.4% Class B/C rate is similar, but it is down just 10 basis points for the quarter and year-over-year.
Cushman & Wakefield reports an overall Manhattan vacancy rate of 9.0% for the second quarter, down 40 basis points from a year earlier. “Midtown South has become so tight that tenants in that market are now starting to look at Downtown or Midtown alternatives,” according to this source. Studley, Inc. reports an availability rate of 11.1%, up 40 basis points from the prior quarter due to the addition of some of the space under construction to the available inventory. Demand is not strong enough to absorb it, according to this source. Reis expects the vacancy rate to end 2012 and 2013 at 10.0%, and then resume its decline despite the addition of new supply. By the end of 2016 the firm predicts the rate will have reached 8.6%.
SUPPLY AND DEMAND
Following a weak first quarter, net absorption totaled 722,000 square feet in the second quarter including 547,000 square feet for Class A and 175,000 for Class B/C. The total over the past four quarters is 1.4 million square feet; the forecast for all of 2012 is plus 1.2 million. New supply has been virtually absent since 2010, but as it picks up net absorption is forecast to pick up as well, exceeding 4 million square feet in each year from 2013 to 2016.
New supply is needed in part because so much space has been lost to the multi-tenant inventory, due to 9/11 and office to residential conversions. The inventory is 18.5 million square feet lower than it had been at year-end 2000. The World Trade Center disaster is not the only reason, as the inventory is also 2.6 million square feet lower than at year-end 2001— despite 12.7 million square feet of new supply added in the decade from 2002 to 2011. With the apartment market on fire, additional conversions of older office buildings to residences may occur. The current inventory is down 550,000 square feet from the start of 2012.
Reis predicts that 16.8 million square feet will be added from 2013 to 2016, bringing the inventory close to its level during the 1990s. Currently 8.4 million square feet are listed as under construction at the World Trade Center site, although only two of four buildings are rising much above the foundations with completion dates in 2013. The other two buildings await tenants and are expected to complete construction in 2015 and 2016. Planned and proposed projects with development schedules are dominated by two buildings with 3.4 million square feet in the Hudson Yards redevelopment area on the far West Side. These are expected to start construction in late 2012 and early 2013, and complete construction in early 2015. The only major building under construction in the established high-rent areas of Midtown is an office condominium, the 748,000-square-foot International Gem Tower, which is due to open in the middle of 2013.
Office rents are hardly soaring. New York’s second ranking average asking rent gain for the second quarter was up just 0.7%, to $58.11 psf, while the average effective rent rose 0.8% to $47.58 psf. The year-over-year gains are 3.9% and 4.9% respectively, well above the overall inflation rate but nowhere near enough to reverse the sharp rent decreases of 2009. The Class A asking average of $70.90 psf is up 0.8% over three months and 4.2% from a year earlier. The Class B/C asking average of $41.95 psf is up 0.5% for the quarter and 3.3% year-over-year.
“With a vacancy rate of 9.0%, at the top end of the equilibrium range of 7.0% to 9.0%, rents in Manhattan are experiencing modest upward pressure,” according to Cushman & Wakefield. This source reports an overall rental rate of $58.86 psf. Studley, Inc. reports an asking rent of $53.78 psf, up 7.4% from the prior quarter “due largely to the addition of higher-priced new product” that is now under construction. Rents are soaring in Midtown South and rising in Midtown proper, but flat compared with a decade earlier Downtown according to this source. Newmark Knight Frank reports an asking rent of $51.48 psf, down slightly from the prior quarter.
Following gains of 4.0% asking and 4.8% effective in 2011, Reis predicts increases of around 3.5% for all of 2012. Stronger gains are forecast to begin in 2013, with the greatest at 4.8% asking and 6.0% effective in 2016. Some time that year the effective average is predicted to surpass its 2007 level. The recent past has featured far steeper rent swings, with asking and effective rent gains in excess of 20.0% in 2007 and decreases of 14.4% asking and 19.8% effective in 2009. Reis does not expect a repeat of that boom and bust cycle in the next few years.