Manhattan Commercial Market Exits '06 Like It Entered '01

Up went the Manhattan commercial market in 2006, so much so that analysts now compare it to the boom year

Up went the Manhattan commercial market in 2006, so much so that analysts now compare it to the boom year of 2000, one of the healthiest years ever for any American commercial market.

A new report from Cushman & Wakefield puts the Manhattan office vacancy rate at 6.7 percent at the end of last year, down from 8.4 percent at the end of 2005. The average asking rent for office space in the borough hit $50.56 a square foot, up nearly 25 percent from the end of 2005, and right below the all-time asking rent of $50.92 at the end of 2000.

The Cushman & Wakefield report, unveiled on Tuesday morning amid a bacon-egg-bagel breakfast at Midtown power eatery Michael’s, also noted healthy growth in 2006 in the investment sales hotel, and retail markets of Manhattan.

Other notable nuggets in the report:

  • There’s no office space left for leasing in Greenwich Village or in Soho.
  • Midtown South has the nation’s second-lowest vacancy rate at 5.6 percent.
  • There were 41 leases in 2006 with rents above $100 a foot, more than triple the number in ’05.
  • Average retail asking rents on prime Fifth Avenue in Midtown averaged $1,500 a foot in 2006.
  • Foreign investors accounted for 15 percent of the investment sales of last year.
  • Release on the report after the jump.

    – Tom Acitelli

    Cushman & Wakefield
    Dept. of Corporate Communications

    For immediate release

    * * *


    Availability of premier space declines to 4.4 percent

    21 Midtown buildings command rents above $100 psf

    Downtown stages a comeback

    NEW YORK – Jan. 9, 2007 – Cushman & Wakefield today released year-end statistics for the 2006 Manhattan office market showing average asking rental rates approaching the record high achieved in 2000.

    At the end of 2006, Manhattan asking rents rose to $50.56 per square foot, up nearly 25 percent from $40.58 at the end of 2005, and just below the all-time high of $50.92 at the end of 2000.

    “A decline in available space has propelled us to near-record rental growth,” said Joseph R. Harbert, Cushman & Wakefield’s chief operating officer for the New York Metro Region. “It would not surprise me if we exceed the all-time high by the end of the first quarter.”

    In addition to average asking rents, 2006 saw an increase in the top end of the market. There were 41 leases signed with rents above $100 per square foot, more than triple the number last year. Moreover, the number of office buildings commanding $100 rents increased from five in 2005 to 21 at the end of 2006.

    The price increase comes as the overall office vacancy continues to fall. Manhattan’s vacancy rate declined to 6.7 percent at the end of 2006, down from 8.4 percent at this time last year.

    “On one hand, it’s more expensive than ever to operate a business in Manhattan,” said Mr. Harbert. “On the flip side, more businesses have indicated an ability and willingness to pay this premium, as vacancy across Manhattan continues to decrease.”

    All three submarkets of Midtown, Midtown South and Downtown experienced significant drops in vacancy in 2006, and remain among the lowest in the United States. The biggest drop was Downtown, where vacancy fell to 8.4 percent, from 10.6 at this time last year. Midtown dropped to 6.4 percent from 7.8 percent, and Midtown South fell to 5.6 percent from 7.4 percent.

    The significant drop in vacancy was attributed to leases signed for large office relocations in 2006, as well as existing tenants renewing and expanding in current space. The number of leases above 100,000 square feet increased by more than 55 percent to 42, up from 27 in 2005. Of these, 50 percent were renewals or expansions in 2006, compared to 22 percent in 2005.

    “As availability continues to decline, tenants are locking in the space they have,” said Mr. Harbert. “They’re also expanding for future growth. With prices steadily increasing, they’ve made the decision to act now, rather than later when asking rents may be even higher.”

    With direct class-A vacancy in Manhattan at 4.4 percent at year-end, tenants looking for premium space are finding limited options. New construction added to the market was absorbed quickly. In 2006, two million square feet of speculative office space was completed – 7 World Trade Center and 505 Fifth Ave. – and by year-end more than 60 percent of it had been leased. In 2007, the only commercial office building expected to be delivered is The New York Times building, which is currently 77 percent pre-leased.

    Leasing activity Downtown totaled more than 5.6 million square feet, the highest since Sept. 11 and up 64 percent from 3.4 million at this time last year. Activity was led by Moody’s 589,125-square-foot lease at 7 World Trade Center, the year’s largest lease in all of Manhattan.

    According to Mr. Harbert, the outlook for continued demand remains positive. Financial services firms, which in 2006 accounted for 33 percent of leasing activity, are driving the demand. Together with legal services firms, which accounted for 12.2 percent, the two industries make up nearly half of the year’s total square footage leased.

    All told, 2006 was a record-breaking year on all fronts for the Manhattan commercial real estate market. In addition to unmatched office rents, the year marked new highs for the property sales and retail sectors. In December, 666 Fifth Ave. went into contract to be sold for $1.8 billion, the highest price ever paid for a single office property. The Mandarin Oriental hotel in the Time Warner Center is under contract to be sold for $1.37 million per room, also a record-breaking transaction. In December, Gucci announced it would lease 46,000 at Trump Tower on Fifth Avenue, for what is expected to be the highest retail rent ever paid.


    The Manhattan investment sales market continues to break records. Preliminary estimates for the total value of transactions closed in 2006 reached nearly $30 billion, up considerably from $20 billion in 2005, and double the $15 billion completed in 2004.

    “This was truly a remarkable year for investment sales,” said Mr. Harbert, “and with more than $20 billion of transactions currently under contract, we believe in 2007 the momentum will continue.”

    Among the highest-profile sales of the year was the $1.8 billion sale of Tishman Speyer’s 666 Fifth Ave. to Kushner Properties, arranged by Cushman & Wakefield’s New York Capital Markets Group. The sale, the highest price ever paid for a single office building, surpassed the 2005 record, the $1.72 billion sale of the MetLife Building.

    Several major office transactions closed or were placed under contract at or above the $1,000-per-square-foot level in 2006. The most recent, Two Herald Square, was placed under contract in the last week of December at approximately $1,400 per square foot.

    “Leasing fundamentals are extremely strong, and investors are betting the Manhattan office market will remain hot,” said Mr. Harbert.

    Office properties, specifically premier space, made up the majority of properties sold. Class-A offices alone accounted for nearly 37 percent. Land sales accounted for nearly 7 percent, down from 15 percent at this time last year, as demand for residential sites leveled.

    Private investors were the drivers of property sales, pouring $18.5 billion into the Manhattan sales market and accounting for 62 percent of acquisitions. Foreign investors also upped their stakes, accounting for 15 percent of volume, up from 12 percent last year. The increase in foreign activity was primarily attributable to a few major acquisitions by Dubai-based Istithmar.


    Much like the Manhattan office market, the hotel sector exhibited continued strength in 2006. According to leading travel research firms, Manhattan’s nightly rates are the most expensive of the top 25 largest U.S. hotel markets.

    “With a lack of supply and unabated demand from domestic and international tourists, occupancy should remain steady in 2007, and we expect room rate increases of approximately 6 to 8 percent,” said Mr. Harbert.

    According to Mr. Harbert, “at 83 percent, occupancy levels have reached their peak in a market with limited supply.” High construction and land costs have made it difficult to build large hotels on quality sites, and almost all projects planned or under construction are boutique hotels with less than 200 rooms. The exception – the new Javits Convention Center hotel – will likely receive a number of city and state subsidies.

    Throughout 2006, this translated to strong activity on the investment front, as investors competed for Manhattan’s best hotels. Istithmar, the Dubai government-owned investment company, recently went into contract to buy the Mandarin Oriental hotel in the Time Warner Center for about $1.37 million per room, breaking the record it set in October when it acquired the W Union Square Hotel for $285 million, the first time a hotel in Manhattan sold for more than $1 million per room.

    This year also saw the slowdown of the hotel-to-residential conversion craze, as several properties that had went residential were converted back to hotels. In 2006, Cushman & Wakefield represented Alchemy Properties in the sale of the Sutton Hotel to Korman Communities. The property, originally a hotel and then converted to condominiums, will now be converted back to a long-term-stay hotel. According to Mr. Harbert, with a slightly slowing residential market and continued rate increases, this trend is expected to continue in 2007.


    Manhattan retail rents continued their upward climb throughout the year. Upper Fifth Avenue, currently the most expensive retail location in the world, saw strong activity and record pricing, as Gucci leased 46,000 square feet at Trump Tower in what was said to be the highest retail rent ever paid. Average asking rents on the upper part of Fifth Avenue averaged $1,500 per square foot, climbing steadily from $1,300 per square foot in 2005.

    Another significant lease in 2006 was Best Buy’s 46,000-square-foot lease at 1880 Broadway. Rents on Manhattan’s Upper West Side jumped $30 to $295 per square foot, up from $264 at this time last year. “We expect to see increased activity on the West Side as residential development has continued,” said Mr. Harbert.

    The slowdown of retail bank activity, first noted in 2005, continued in 2006 as retailers outside the financial sector showed interest in prime corner locations. H&M leased 20,000 square feet at the new office tower 505 Fifth Ave., continuing its Manhattan expansion on the corner of Fifth Avenue and 42nd Street.

    But it was luxury that ruled the Manhattan retail scene in 2006, noted Mr. Harbert, as new brands entered Manhattan and established ones ventured into new neighborhoods. Tom Ford chose 845 Madison Ave. for his first menswear boutique, and luxury denim brand Evisu will open its U.S. flagship at 92 Greene St. in Soho, with both brands planning expansion across the country. Wall Street welcomed the addition of luxury retail, as Tiffany & Co. and Hermes announced new leases Downtown.

    “We’ve certainly seen a promise of a revitalized Downtown and expect more announcements in 2007,” said Mr. Harbert. “Luxury retail goes hand-in-hand with the new high-end residential units, and will certainly benefit from the ongoing strength of the financial services sector.” Manhattan Commercial Market Exits '06 Like It Entered '01