Tenant's Viewpoint In this landlords' market, tenants should expect to see a continuing rise in overall occupancy costs
This will result not only from increased rental rates and decreased concession packages but also increases in space measurements, whereby landlords raise the rentable square footage ("rsf") of space returning to market, otherwise known as "remeasurement", a landlord euphemism for increasing the “loss factor.” Tenants will need to accept that even if their requirements for useable space do not change, their rentable space may increase upon renewal or relocation by 10% - 25%. With the cost of leasing space increasing dramatically, tenants need to continually assess their options and understand their negotiating leverage. Tenants aiming to lower occupancy costs should consider moving to areas such as Long Island City, Brooklyn and Jersey City with their lower rental rates, better concession packages and greater municipal incentives. Moves to these locations will, however, be strongly linked to the ability to retain key employees. Market Overview Not since the boom days of the dot com era has Manhattan experienced such demand and subsequent rent increases for commercial office space. During 2006, rents for Class A space in Midtown increased 21% settling in at an average of $67.45 per rsf. All indicators suggest that the City's economy will continue to strengthen well into 2007, and create over 50,000 new jobs. While major financial institutions and corporations can weather this environment of rising rents, servicee and smaller businesses as well as non-profit organizations will need to be proactive in respect to their real estate planning. The traditional lower cost markets such as the Garment District, Downtown, Chelsea and Tribeca are experiencing some of the city's highest rental increases compelling many businesses and non-profits to consider Long Island City, Brooklyn and Jersey City. To date, tenants have seemed very willing to absorb the increases in occupancy costs rather than risk losing key employees by relocating outside the city. Trends & Statistics Midtown In the final quarter of 2006, average office rents rose $4.03/rsf (6.4%) to $67.45/rsf for Class A space. The asking price for Class B space saw an increase of $1.33/rsf (3.1%). Vacancy rates continued to drop decreasing by 0.4% from 5.5% to 5.1% within Class A space and by 0.9% in Class B space from 5.0% to 4.1%. Class A net absorption was 693,081 rsf and Class B net absorption was 521,113 rsf for Q4 '06. Midtown South Average asking rents continued to steadily increase rising $0.80/rsf from $39.25/rsf to $40.05/rsf . Net absorption was 233,244 rsf for Class A&B space combined. Vacancy rates dropped 0.3% to 4.9% from 5.2% in the previous quarter. Downtown Downtown Class A space rose $0.47/rsf from $44.80/rsf to $45.27/rsf, while Class B space experienced a much greater increase of $4.25/rsf (13.0%) from $32.13/rsf to $36.38/rsf. Total net absorption was 710,317 rsf and 232,519 rsf for Class A and Class B space, respectively. Class A vacancy rates dropped 1.0% from 11.3% to 10.3%. Class B vacancy rates saw a similar decline, dropping from 10.8% to 10.0%.