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As seen in
August 6, 200
Real Estate
Commercial Property / The Manhattan Market
Office Rents ARe Up Sharply in the
Second Quarter
Fears are raised that smaller service firms may be driven out.
by JOHN HOLUSHA
Office rents, which have been rising steadily
for several years, spiked upward in the second quarter of this
year, leading some real estate executives to express concern
that vital service providers, such as smaller law and accounting
firms, may be driven out of Manhattan.
According to figures compiled by the Williams Real Estate company,
the average annual asking rent for office space in Manhattan
increased 16.9 percent in the three months that ended in June,
to $54.44 a square foot. Asking rents have increased 28.1 percent
since the beginning of the year; the year-to-year increase was
35.3 percent.
The increase in rents is directly linked to the shrinking amount
of space available for occupancy. Williams calculates that the
overall vacancy rate for all office space in Manhattan is 5.1
percent, a decrease of 14.2 percent during the second quarter
and a drop of 47.7 percent from June 1999.
And the averages understate the actual shortage of space available
at what many consider affordable rents. In the Midtown market,
53.5 percent of the space on the market had an asking annual
rent under $50 a square foot at the end of the second quarter
of 1999. By the end of June this year, only 9 percent of the
space was under $50 a square foot.
"A plausible Midtown business address is going to cost
at least $55 a square foot and more likely $60 or $70,"
said Michael T. Cohen, the President of Williams. "For
a while the financial district was the last refuge for companies
priced out of Midtown, but it’s not a refuge anymore. The
space has been absorbed, and the rents spiked again in the last
quarter."
The downtown business district had a 12 percent availability
rate at the end of the second quarter of 1999 and an average
annual rental rate in the low $30’s a square foot. By the
end of June this year, the availability was under 6 percent
and the average rent over $40 a square foot.
"The vacancy rate is at the lowest point in 20 years,"
said Steven A. Swerdlow, Senior Managing Director of the New
York office of CB Richard Ellis, a real estate services company.
"And rents have eclipsed the highs of the early 1980’s
on an inflation-adjusted basis."
The strength of the market is all the more remarkable because
of the recovery from the financial crises in several parts of
the world in the fall of 1998, said Barry Gosin, the chief executive
of Newmark & Company Real Estate, a brokerage and property
management company. "People were very concerned there would
be no liquidity, but now with the economy healthy and growing,
everybody needs space."
Once again the averages mask some of the high points in a market
where prosperous companies needing space to grow compete with
one another for the limited amount available. "I am negotiating
rates that start at $115 a square foot," said Tara Stacom,
an executive director at Cushman & Wakefield, a large brokerage
and real estate services company. "My father [Matthew J.
Stacom, also an official at Cushman & Wakefield] predicted
we would see rates of $100 a square foot by the end of the century,
and people told him he was crazy. Well here we are and here
they are."
Mr. Cohen said he was concerned that Manhattan would become
home to an elite, with only the biggest, richest companies able
to pay the rent to stay at prime locations. He said it would
be bad for the city in the long term, and bad for his business
as well.
Medium-size law firms, those with fewer than 100 lawyers, and
moderate-size accounting firms are coming under intense pressure
as a result of the rising rents. He said that one law firm that
is his client – which he would not name – recently
agreed to a rent increase before the expiration of its current
lease to avoid being pushed immediately to the market rate when
it rolls over.
"You like to think of New York as a land of opportunity,
with a quilt of entrepreneurial companies of different sizes,"
he said. "But if only the big, rich companies can afford
to stay, that thins out the city’s economic base and leaves
it vulnerable in the long term."
In addition to the big picture, Mr. Cohen said he had strong
little-picture fears as well. "I am a purchaser of legal
and accounting services and I get better quality services when
there are many firms competing for my business," he said.
"If high rents thin out the ranks of local services providers,
that works to my disadvantage."
Mr. Swerdlow said he also saw that as a danger. "There
will be haves and have nots," he said. He said that Internet
and new-media companies say they cannot afford to wait for new
construction, such as the million-square-foot building Forest
City Ratner Companies is planning at its Metrotech complex in
Brooklyn, and so they increase the pressure in the existing
market.
If only the richest companies can remain in Manhattan, "it
changes the fabric of city life," said Mary Ann Tighe,
Vice Chairman of Insignia/ESG, a real estate brokerage and services
company. ‘It will be different if only the top knowledge
workers and their immediate support staff remain, and the effects
will ripple out to the stores and restaurants."
Real estate executives said they saw nothing on the horizon
to dampen the office market in Manhattan and said it would continue
to drive tenants to look for alternatives such as Jersey City
and the rest of the New Jersey coast facing the city. Many say
they expect more building in downtown Brooklyn and in the Long
Island City section of Queens.
And the remaining fringes of Manhattan are expected to be renovated
for tenants who cannot overcome a reluctance to cross a river.
"We are going to see a lot of activity on 11th and 12th
Avenues between 30th and 59th Street," said James S. Meiskin,
President of Plymouth Partners, a brokerage specializing in
representing tenants.
This area is one of the last sections of
Manhattan that is primarily industrial, with garage, warehouses
and distribution centers. But the successful conversion of old
factories farther south in Chelsea to offices for new media
and Internet companies makes it likely there will be demand
for office space farther north.
The high rents for office space are forcing companies to decide
how many people they actually need in Manhattan, and how many
might be just as well based in less costly boroughs and suburbs,
real estate executives say.
Regardless of the effect it may have on the ambience of the
city, economics are forcing tenant companies to look hard at
their Manhattan operations. "Every business has to consider
why they are here," Ms. Tighe said. "They have to
determine what kind of work has a profit margin that justifies
housing a person in Manhattan."
As companies split their operations, with only the high-value-added
jobs staying in Manhattan, the boroughs of Brooklyn and Queens
should benefit, she said. "Queens is going to be hopping
and downtown Brooklyn is going to be active too," Ms. Tighe
said. "These areas have not shared in the job growth because,
at least in the past, people wanted Manhattan addresses."
But even soaring rents are not a deterrent to companies that
are lacking an even more precious commodity: skilled workers
to operate the business.
"I have two clients who moved out and are trying to move
back in," Ms. Stacom said. "They couldn’t find
the labor they needed and they’re trying to come back because
New York still has the right labor supply."
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