London, Paris and Tokyo Make Manhattan Look Cheap

Manhattan office-market stats out last week showed what everyone already knows: The borough has one of the most expensive and tightest office markets in the world.

But it’s nothing compared to Paris, London, Hong Kong and a few other (select) cities.

In fact, Manhattan stayed a relative steal during the very successful market run of 2006. Not only is it cheaper to rent space here than in a lot of other major world cities, the costs are more evenly felt, void of the spikes seen elsewhere last year.

The average rent for top Manhattan office space in the fourth quarter of 2006 was $61.11 per square foot, according to the brokerage Cushman & Wakefield; for the market overall, the asking rent was $50.56. These were both increases over the third quarter of 2006, and over the fourth quarter of 2005. And the per-foot rent on some of the best of the best office space now reaches over $150.

The vacancy rate for top space was 6.3 percent in the fourth quarter, down from the third quarter and from the same time in 2005. Overall, it was a similarly low 6.7 percent.

In short, the Manhattan office market is tight and pricey—easily the most expensive in the United States, relatively or not.

It’s no Paris, though, and it’s certainly no London. Those European capitals, along with Tokyo, make Manhattan look like Staten Island having a garage sale. Worldwide corporations can stomp a footprint in what remains the world’s financial capital, New York, but pay far less to do so. If the corporations want space in the other cities, however, it’s going to cost considerably more—maybe a few times more.

Brokerages and analysts generally acknowledge London’s West End as the world’s most expensive office market. A November report from CB Richard Ellis looking back 12 months put the occupancy costs of renting office space there at $212.03 a foot.

In the report, Manhattan (and, by extension, the United States) didn’t make the list of the world’s priciest office markets until … No. 24, with midtown Manhattan showing up at $62.07 per square foot, snug behind Zurich, Switzerland, and about a half-dollar confidently ahead of Stockholm, the Swedish capital.

Between the West End and midtown came a host of cities and submarkets: Tokyo (the Inner Central district came in at No. 2, just below London), Hong Kong, Dublin, Dubai, New Delhi, Seoul and Milan, with costs from the mid-$100’s per square foot to just above $60.

“One of the things that’s been driving the West End market is hedge funds and financial boutiques and private banking, which have obviously had a very good few years,” said Nick Axford, CB Richard Ellis’ research director for Europe, the Middle East and Africa.

Sound familiar? Like Manhattan, financial services drive much of the office markets of cost titans Tokyo and London. In the City enclave of London, east of the West End, office occupancy costs—which include rent, taxes and other tenant costs—averaged $144.78 a foot for much of 2006.

Other variables drive the pricier markets beyond tenant rosters feasting on strong economies. Architecture, for one—especially when it comes to the world’s most expensive market.

“The planning restrictions are very tight in the West End,” Mr. Axford said. “There’s strict planning constraints to what you can do with buildings. Most of them date back to Georgian times.”

That’s as in the various Kings George of 18th-century Britain. With these elderly, squat buildings (and no skyscrapers), much of the West End’s higher office costs spring from a demand for relatively little space. In Manhattan—particularly in midtown, with its concrete canyons—companies have more options, however dwindling in today’s tighter market.

Companies can also count on costs remaining steadier in New York than in other world cities.

In Hong Kong, average rents spiked 30 percent in 2006 over 2005 to $75.90 a foot, according to the year-end numbers from CB Richard Ellis. In Tokyo and Madrid, rents were up 24 percent, and in London, 21.9 percent. In New York, rents went up last year just 7.9 percent.

On Jan. 9, Cushman & Wakefield presented its 2006 market report at the midtown power luncheonette Michael’s, serving up eggs, bacon, bagels, fruit, and a heap of hyperbole backed strongly by the higher rental and lower vacancy stats as compared to 2005 (or to 2004, 2003 and 2002).

Joseph Harbert, the firm’s C.O.O. for the New York metro region, pulled up a chart that put Manhattan at No. 7 among the world’s costliest office markets. It was the only American city on the list, and Mr. Harbert put it plainly.

“Relative to these other places, historically, the last year or so, New York is still cheaper than many of the other prime business centers in the world,” he said. “We think it will probably pop up in the rankings a little bit. But if you’re a global corporation and you need to be in New York, and you want to be in New York, you’re going to pay the freight.”