The reality of triple digit rental rates should cause alarm for service industry providers that want to be positioned in "Class A" Midtown properties, as costs become prohibitively high. Low margin businesses will feel the greatest impact if real estate prices continue to escalate at 10% - 15% per annum.
Over the past twenty years, Midtown rental rates in NYC have fluctuated within a fairly well defined range; not exceeding asking rents in the $80's/rsf nor falling below a range in the low $40's/rsf. Current asking rental rates are surpassing even the highs of early 2001, with non-trophy Midtown "Class A" buildings asking rents beginning in the $70's/rsf and exceeding $130/rsf in the "trophy" class. The reality of triple digit rental rates should cause alarm for service industry providers that want to be positioned in "Class A" Midtown properties, as costs become prohibitively high. Low margin businesses will feel the greatest impact if real estate prices continue to escalate at 10% - 15% per annum.
The demand for office space in Manhattan continues across all submarkets. The Downtown submarket has seen increases in asking prices in excess of 30% for "Class A" space over the past year. Such an increase is indicative both of a lag in that submarket and decisions by landlords to raise rents as vacancies drop in a hot Midtown submarket. In Midtown, landlords continue to aggressively raise asking rents, as reflected by 10% - 15% increases in most submarkets in the past twelve months. Trophy buildings are now commanding starting rents above $130/rentable square foot ("rsf"), and buildings outside of the Plaza District, such as One Bryant Park (42nd Street & Sixth Avenue), are beginning transactions at $100/rsf. There are no signs that market will ease in the near future.
Trends & Stats
Average asking rents rose $3.64/rsf from the second quarter to $63.41/rsf for "Class A" space. Asking rents rose $1.36/rsf to $41.52/rsf for "Class B" space. Respectively these represent one-year increases of 13.1% and 9.6% for "Class A & B" average asking rents.
Vacancy rates dropped during the last quarter 0.4 points to 5.5% for "Class A" space and decreased 1.0 points to 4.9% for "Class B" space. "Class A" net absorption for the third quarter was 909,997 rsf and "Class B" net absorption was 558,608 rsf.
Midtown South ("Class A&B")
During the third quarter, average asking rents rose $0.86 from the previous quarter to $39.25. This represents an increase of 12% over the past 12 months. Net absorption for the third quarter was 259,197 rsf. Vacancy rates dropped 0.3 points from the previous quarter to 5.2% and availability for the last reported quarter was 7.6%.
Since 3Q05, asking rents have risen $11.15/rsf to $44.80/rsf for a 33% increase in "Class A" asking rental rates. Over the same period, "Class B" asking rents rose $2.56/rsf to $32.13/rsf for "Class B" space. Since the 2nd quarter this represents increases of $3.25/rsf in "Class A" and $1.40/rsf in "Class B". "Class A" vacancy rates rose by 1.1% from the second quarter 2006 to 11.6% and "Class B" decreased 1.5% to 10.5%. The increase in the vacancy rate was due to a large block of space coming onto the market. Space availability at the close of the third quarter were 11.2% and 12.3% for "Class A & B" respectively.