The 352-million-square-foot general purpose, multi-tenant Manhattan office market has something that was once common but is now rare—a vacancy rate in the single-digits. Nationally, the low vacancy era came to an end in the nationwide commercial property bubble of the 1980s, which was followed by the bust that sank the savings and loans. From then until recently there had been little new office space in Manhattan, and with office to residential conversions and the 9/11 disaster, the inventory has shrunk. But as of this moment, office construction is booming.
The vacancy rate is 9.8% as of the first quarter of 2013 according to Reis, down 10 basis points from the prior quarter and 60 from a year earlier. The prior cyclical low was 5.7% in 2007; the rate had reached 3.8% in 2000. Class A vacancy rate fell 10 basis points during the quarter to 9.5%, while the Class B/C rate fell 20 basis points to 10.2%.
Cushman & Wakefield reports a vacancy rate of 9.1% for Manhattan, unchanged from a year earlier. This source predicts upcoming vacancies along 6th Avenue will cause the rate to rise during the second quarter. Studley, Inc. reports an availability rate of 12.6%, up 40 basis points from the prior quarter and 180 from a year earlier. Limits on the financial sector in the wake of the crisis and scandals, according to this source, have "choked the goose that laid the golden egg" while growing sectors such as tech are unwilling to pay for prime office space in Midtown and Downtown and remain concentrated in Midtown South. Newmark Grubb Knight Frank reports a 20-basis-point vacancy rate increase in the first quarter, to 12.9%, following vacancy decreases in 2012. According to the baseline Reis forecast, the vacancy rate will end 2013 at 9.9% and fall to 9.0% in 2017.
Hurricane Sandy has distorted net absorption totals in the short run. In the Downtown submarket, 2.05 million square feet of negative net absorption in the fourth quarter of 2012 was followed by plus 2.24 million in the first quarter of 2013; the market-wide totals were minus 1.6 million followed by plus 2.1 million. The net for the two quarters combined was just 480,000 square feet, positive but not strong for a market this size. Demand, in fact, has been weak here for some time and took a particularly large hit in 2008 and 2009, when net absorption totaled negative 20.6 million square feet. Little of that has been made up despite strong job growth.
Following the 1980s boom, new office construction has been limited in New York City, with most space added through industrial to office conversions in places such as Midtown South. New construction averaged less than 800,000 square feet of multi-tenant space per year from 1991 to 2012, and virtually all of that required extensive pre-leasing to get off the ground. A few major owner-occupied buildings have also been added. The office inventory is 19.5 million square feet smaller than it had been in 1998. The Class A inventory is down 6.6 million square feet since 1999, due mostly to 9/11, while the Class B/C inventory is down 12.3 million square feet since 1990, due mostly to residential conversions.
Now, however, Reis reports 13 million square feet under construction in Manhattan, including 9.2 million at the World Trade Center site and 1.7 million at Hudson Yards. Additional projects are under construction in the other boroughs. The baseline Reis forecast calls for an average of 3.5 million square feet to complete construction each year from 2013 to 2017, but 4.2 million square feet to be absorbed.
The solid but moderate pace of office rent gains observed in 2011 and 2012 continued in the first quarter of 2013. The average asking rent increased 1.6% to $60.21 psf, while the average effective rent rose 1.5% to $49.58 psf. The year-over-year gains were 4.4% and 4.8%, respectively. The Class A asking average of $73.28 psf was up 1.8% over the quarter, while the Class B/C asking average of $43.60 psf—more than the Class A rate in most markets—was up 1.6%. The year-over-year gains were 4.2% for Class A and 4.5% for Class B/C.
"Manhattan average asking rents rose to $59.60 psf, representing an increase of 1.2% from March 2012," according to Cushman & Wakefield. "At $51.97 psf, Midtown South asking rents rose the most substantially, mainly due to higher priced blocks of space placed on the market." Studley, Inc. reports flat asking rents at $57.20 psf overall, but falling Class A rents. "Of note, Class B rents rose in several submarkets, including an 8.0% spike to $49.10 psf on the Westside," according to this source. That is where Hudson Yards finally broke ground and the Flushing Line extension is nearing completion. Newmark Grubb Knight Frank reports a first quarter overall asking rent of $52.92 psf, down 2.8% from the fourth quarter.
The Manhattan office market continues to experience huge surges and contractions of office demand. On the supply side, while the inventory has proven to be quite flexible over the long term the complexity and long time frames of building in a dense city makes in inflexible in the short run. Thus, rent spikes and collapses have often balanced the market. The Reis baseline forecast continues to predict a moderation of this history. Gains of 4.1% asking and 4.4% effective are forecast for 2013, similar to the past two years, with slightly higher gains to follow.