FEATURE ARTICLE, DECEMBER 2005

IN MANHATTAN, DISPARITY GROWS BETWEEN MIDTOWN,
DOWNTOWN OFFICE RENTAL RATES
As Midtown continues to see rental rate increases due to demand, the gap between Midtown and Downtown has grown.
Frank Doyle

Frank Doyle

Around September 2001, rents in both submarkets lay within about $20 per square foot of each other. Midtown Class A average asking rents were $65.43 per square foot and Downtown Class A average asking rents were $44.68 per square foot. Average asking rental rates in both submarkets began a downward trend after the events of September 11, 2001.

Since then, asking rental rates in both submarkets have taken markedly different paths. Midtown asking rents, which reached a low point of $51.83 per square foot in September 2003, have slowly climbed back up to levels seen prior to the terrorist attacks. Downtown average asking rents finally hit a low point in June 2005 at $32.27 per square foot.

In the third quarter of 2005, asking rents for Midtown Class A office space reached $58.24 per square foot and asking rents for Downtown Class A office space reached $38.51 per square foot. That alone puts the disparity in average asking rental rates between Midtown and Downtown at $20 per square foot. When incentive programs for Lower Manhattan are taken into account, the disparity in overall average rental rates between Midtown and Downtown Class A office buildings rises to around $36 per square foot.

The disparity looms even greater within a handful of the city's premier office buildings. However, since so few spaces in trophy-quality buildings either in Midtown or Downtown can boast such stellar rents, they are not considered representative of market rents. Average asking rents for premium spaces among trophy-quality properties in Midtown have risen above $100 per square foot, with some buildings reaching as high as $125 per square foot. Similar high-end buildings in Lower Manhattan command asking rents of $53 per square foot. That puts the disparity in average rental rates between trophy buildings in Midtown and downtown Class A properties at nearly $60 per square foot.

Midtown asking rents are expected to surpass the $60 per square foot mark year-end or early next year, which would push the disparity even higher. That's especially true given that prospects for Downtown rents to surpass the $40 per square foot market are not so clear.

During the past few years, space users from many industries have been clamoring for Midtown office space. Activity there has been steady enough to send the Class A availability rate below 10 percent, or lower for certain hot submarkets, in the third quarter of 2005. The Downtown market remains a hard sell to tenants that continue to eye the area with concern following the events of September 11, 2001. The Class A availability rate in Lower Manhattan was posted at 13.8 percent as of the third quarter of 2005.

While leasing activity was slow throughout Manhattan in the third quarter of 2005, the city's office market remains on pace this year to surpass last year's total overall net absorption.

Manhattan posted 7.3 million square feet of overall net absorption through the end of the third quarter of 2005. Given that the city saw total overall net absorption in 2004 of 7.5 million square feet, the office market should see more space absorbed this year than it did in 2004. In addition, the number of large blocks of contiguous available space has steadily declined in the past year, with just 22 blocks in Midtown from 25 at the end of the second quarter 2005 and 38 at mid-year 2004.

The most significant event affecting the Midtown office market resulted from 480,300 square feet of office space at 245 Park Avenue being taken off the market. Northwestern Mutual Life Insurance signed a lease for 45,000 square feet of space in the building and J.P. Morgan Chase pulled the remainder for its own potential use. The removal of the space at 245 Park Avenue from the market caused average asking rents in Midtown to drop due to the building's high rental rates.

The Downtown market was also quiet in September, recording just one deal larger than 30,000 square feet. Tower Insurance renewed and expanded at 120 Broadway for 94,000 square feet. Overall availability rates fell with the removal of 158,220 square feet at 40 Broad Street from the market. That space was part of a block of 204,800 square feet at the building that was newly listed in August.

New York appears on track to end the year in remarkable shape, with average asking rental rates increasing and availability rates decreasing both in Midtown and Downtown. Those trends should continue, given that space users in many industry sectors have continued to hire new employees. In just the first 8 months of the year, New York's private sector posted nearly double the job growth it saw during all of 2004. In addition, activity within the city's office market typically picks up in the final quarter of the year as companies seek to complete transactions before the end of the year.

Frank Doyle is a managing director with the New York office of Jones Lang LaSalle.


©2005 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.