NYC Office Rents Post First Gain Since Lehman Collapse

January 11, 2011, 12:48 PM EST

by David M. Levitt

(Adds Cushman executive’s comments from media briefing starting in third paragraph.)

Jan. 11 (Bloomberg) — Manhattan office rents rose for the first time in more than two years in the fourth quarter as landlords took advantage of a surge in demand for space, according to brokerage Cushman & Wakefield inc.

Rents sought by landlords rose to $54.34 a square foot from $53.80 at the end of September, the new York-based company said today in a report. The increase was the first since the third quarter of 2008, when the bankruptcy of Lehman Brothers Holdings inc. heralded a freeze in leasing. Rents remain 26 percent below the peak in that quarter.

The rent rise is one of several signs of recovery in the Manhattan market, Joseph Harbert, Cushman’s chief operating officer for the new York region, said today at a media briefing. Fourth-quarter office leasing totaled 7.5 million square feet (696,770 square meters), the most since the third quarter of 2006, as renters sought to make deals before prices climbed.

“we see that continuing,” Harbert said. “The number of deals that we thought were going to close in December that didn’t close was enormous. And a lot of these were large tenants. we expect that velocity in the first quarter is going to be probably about the same rate.”

The city’s unemployment rate fell to 9.1 percent in November, the lowest since April 2009. Private-sector employment rose 1.6 percent in the 12 months to about 3.2 million, with financial-services jobs rising by 5,900, according to the new York State Department of Labor.

‘Residual Worry’

Harbert said his “only residual worry” was that aggressive leasing, particularly in Midtown Manhattan, was the result of “incredible pent-up demand” from companies that held off during the recession.

“Pricing was crazy low in some cases,” he said. “unless employment starts to catch up in the next six months, we could see a little flattening. I suspect we won’t have a gap, but it’s something we’re going to watch.”

Major lease signings in the quarter included French bank Societe Generale, which took 408,000 square feet at 245 Park Ave., and law firm Winston & Strawn LLP, with a renewal of 277,000 square feet at the MetLife Building, Cushman said.

Falling Vacancy Rate

Manhattan’s office vacancy rate fell to 10.5 percent at the end of the year from 10.9 percent at Sept. 30, the largest quarterly decline since June 2007, according to Cushman. Vacancy dropped from 11.1 percent at the end of 2009, the first year- over-year decrease since 2007, the firm said.

in Midtown, the biggest and most expensive office market in the U.S., vacancy fell to 10.6 percent from 11 percent at the end of September and 12 percent a year earlier. Rents rose to $62.46 a square foot from $61.69 in the third quarter and $61.82 at the end of 2009.

Lower Manhattan’s vacancy rate fell to 11.5 percent from a six-year high of 12.1 percent in September. Vacancy is still higher than the 9.6 percent rate a year earlier. Downtown rents fell to $38.78 a square foot from $39.08 in the third quarter and $40.36 a year ago.

Midtown South, the area roughly between 30th and Canal streets, had the lowest vacancy of the city’s three major submarkets, at 8.6 percent. that was down from 9.2 percent in the third quarter and 10 percent a year earlier. Harbert called Midtown South a market in “equilibrium,” meaning that landlords and renters have about the same bargaining power.

Decline in Space

Rents in Midtown South, which includes Chelsea, the Flatiron District and Hudson Square, rose to $44.73 a square foot from $44.25 in the third quarter. they fell from $47.17 a square foot at the end of 2009, according to Cushman.

Cushman and other brokers reported steep declines in space available for sublease from tenants. Downward pressure on rents from underpriced sublease space is receding, according to Peter Kozel, chief economist in the new York office of Seattle-based Colliers International.

about 10.9 million square feet of sublets was available at the end of December, down 37 percent from a peak of 17.3 million square feet in May 2009, according to Robert Sammons, vice president of research at Cassidy Turley in new York.

Tenants have been “grabbing them while they are available,” Sammons said in a Jan. 3 interview. “what you’re going to see probably, moving forward, barring any additional troubles in the economy, you’ll see some price spikes, quite frankly, especially in the Plaza submarket and Rockefeller Center.”

–Editors: Kara Wetzel, Larry Edelman

To contact the reporter on this story: David M. Levitt in new York at dlevitt@bloomberg.net

To contact the editor responsible for this story: Kara Wetzel in new York at kwetzel@bloomberg.net

NYC Office Rents Post First Gain Since Lehman Collapse

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