Office leasing and sales conditions in New York, New Jersey and Connecticut continue to mirror the national economy, with “resilience” and “staying power” as the salient buzzwords. Yet, the tri-state market has spawned several surprising hot spots and promising areas of growth. We believe these resurgent growth centers will begin to expand sooner rather than later. Underlying it all, however, is the very real factor of human nature and the pervading uncertainty of a nation at war. Until corporations become committed to expanding their business plans, job creation — the engine that powers leasing and property sales — will remain at idle.

New York, Manhattan

Although still reeling from the repercussions of a slow national economy and threats of terrorism, Manhattan’s office market has shown tremendous resilience. With 1.16 million square feet in leasing transactions closed in May, Manhattan’s Midtown market continued to see brisk activity with velocity exceeding 1 million square feet for the seventh consecutive month.

For the year to date, leasing activity exceeded that of the same period last year by 65 percent. Meanwhile, Midtown availability continued to tighten, while average asking rents remained fairly stable.

Leasing in the Midtown South submarket increased 47 percent over the previous month’s activity. However, with negative net absorption of 197,000 square feet, absorption for the year to date moved slightly into negative territory.

Meanwhile, rents remained stable, increasing 13 cents in May to $31.88 per square foot. Even Downtown, Manhattan’s most troubled submarket since the terrorist attacks of September 11, 2001, is beginning to show considerable improvement.

In May 2004, Downtown’s leasing was more than double the activity than that of the previous month. For the first 5 months of 2004, velocity exceeded the year-earlier performance by 18 percent. Pricing was unchanged from the previous month, while availability tightened slightly. Absorption for the month remained positive.

New York, Westchester County

New York’s Westchester County office market appears to be sustaining the remarkable activity it exhibited during the past 2 years. While other suburban markets in the country have suffered through a lackluster national economy, Westchester has experienced robust activity energized by a diverse group of tenants.

During the first 4 months of 2004, Westchester County’s office market was stimulated by large transactions, rather than the smaller deals that had been the norm in this market. Foremost was Kraft Foods’ 79,000-square-foot lease at 120 White Plains Road in Tarrytown. The international food giant will be relocating its offices from Rye Brook. Also, Nomura Securities opened a new, 46,000-square-foot office facility at 5 International Drive in Rye Brook. Industry insiders see an influx of 50,000- to 100,000-square-foot deals being consummated in Westchester County during the next quarter.

While these large deals bode well for the market as a whole, they can also be problematic for the future in an area that has an abundance of smaller vacancies.

New York, Long Island

During the first quarter of 2004, Long Island presented one of the healthiest office markets in the region, fueled by high-profile companies renewing leases and expanding their office space in the market. As a result, the market’s availability rate fell to its lowest level in more than 3 years. At 10.1 percent, Long Island boasts the lowest availability rate in the tri-state region. Leasing activity throughout the market was also robust at 633,222 square feet, driven by commitments and renewals.

Interestingly, most of the leasing activity on Long Island for the quarter involved Class B office space. This segment posted 416,000 square feet in total leasing compared to the 216,000 square feet of Class A space leasing in the market during the same period last year.

Another gauge to the confidence in the market’s commercial office segment is the diminishing sublease space. At nearly 1.2 million square feet in the first quarter of 2003, available sublease space was reduced by 29 percent to end the first quarter of 2004 at 845,000 square feet. As a result of this renewed interest, the market experienced positive absorption for the fifth quarter in a row. In addition, overall average rental rates climbed by 12 cents per square foot from a year ago to close the quarter at $24.23 per square foot.

New Jersey, Northern/Central

Over the last year, the Northern/ Central New Jersey office market has reflected the same anemic employment growth as its neighboring regions. Yet, at the same time, these markets benefited from increased demand and only marginal increase in supply.

Demand was evidenced by the 2.49 million square feet of leasing velocity charted in the first quarter of 2004 — up nearly 400,000 square feet from the first quarter of 2003, and 240,000 square feet over the previous quarter. On the supply side, the availability rate of 20.6 percent reflected a 0.2 percent increase in space and, in very positive news, most of it was offered “direct” by landlords. This may be an indication that the amount of sublease space coming on the market may finally be tapering off.

With supply still increasing, there continues to be downward pressure on average asking rents and increased pressure on landlords to beef up concession packages for tenants. Landlords and sub-landlords are still aggressively seeking to capture any demand. They are reading market signals that project growth in office employment over the next 2 years, resulting in a recovery beginning later this year and into 2005.

Connecticut, Fairfield County

Connecticut’s Fairfield County has fared much better than other suburban counterparts throughout the country, primarily due to several major relocations and expansions in the area. Companies throughout the county have continued to grow and expand, although not at the same brisk pace seen at the end of 2003.

Among the most notable expansions in the area was the largest lease closed during the past 5 years. Diageo, a global beverage company, leased the entire southern tower of Building and Land Technology’s Norwalk office campus for use as its U.S. headquarters. In addition, FactSet Research Systems committed to 129,095 square feet of space at 601 Merritt 7 in Norwalk, while Unilever/Conopco took 122,000 square feet of space at 45 Commerce Drive in Trumbull.

Smaller transactions included Northwestern Mutual Life Insurance Company’s relocation and expansion of its divisional operations from the 14,000 square feet it occupied at 535 Connecticut Avenue to more than 17,000 square feet at 285 Riverside Avenue in Shelton.

While these transactions benefited Eastern Fairfield County, they also caused some concerns to the Greenwich and Stamford office markets.

While Greenwich remains a hot spot for hedge funds, traditional financial corporations are migrating from Greenwich to Norwalk and Shelton in order to take advantage of more favorable economics. The Stamford market, which was very active at the end of 2003, saw a reversal of fortune during the first few months of 2004.

Conclusion and Predictions

In light of a declining economy, geopolitical instability and constant threat of terrorism, the commercial real estate office market throughout the tri-state area has shown excellent resilience over the past few years. We are now beginning to see the first signs of a recovery as companies are beginning to re-evaluate their space requirements and, once again, expand and grow.

Predictions for the remainder of the year and early 2005 are optimistic, yet guarded. As the economy begins to emerge from the doldrums, we will see job growth in all sectors. Coupled with the outcome of the November presidential elections, we should experience reinforced stability and a more vibrant commercial real estate market.

Executives from CB Richard Ellis' Manhattan, Connecticut and Long Island offices contributedto this article.

©2004 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.