Colliers Q4 Report: Manhattan Office Market Concludes Milestone 2014 with Improved Economy, Major Projects
--Job growth, TAMI, Lower Manhattan, Far West Side continue to reshape Manhattan landscape--
NEW YORK – FEBRUARY 11, 2015 – The 2014 Manhattan office market had a milestone year in many ways, and despite a slight drop in the fourth quarter, showcased the strongest full year of leasing activity in more than a decade, according to new research from Colliers International. In addition to an improving economy and job growth, technology, advertising, media and information services (TAMI) sector tenants continued to dominate the market, with four of the year’s top ten leases.
Meanwhile, the ever-evolving Manhattan landscape continued to reshape itself, as 2014 saw the completion of several long-awaited office and infrastructure projects, including One World Trade Center, the Fulton Center, the 9/11 Memorial Museum, the final section of the High Line, and the platform which will eventually hold Brookfield Properties’ new Manhattan West development project.
This activity is expected to continue in 2015, including delivery of new office towers at 860 Washington Street and 10 Hudson Yards, the 800,000-sf World Trade Center Transportation Hub, Le District market at Brookfield Place, and completion of the 7-train subway line extension to the Far West Side at West 34th Street and 11th Avenue.
Overall Manhattan leasing activity in the fourth quarter was 8.3 million sf — essentially even with 8.28 million sf in third quarter — but 36.7 percent below the 13.11 million sf a year ago. Full-year 2014 leasing of 36.7 million sf surpassed the previous year’s 33.9 million sf by 8.2 percent, the strongest full year of leasing since 38.2 million sf in 2003.
The overall Manhattan availability rate dropped to 10.0 percent, down from 10.2 percent in the third quarter and 11.7 percent a year ago. The current rate represents the tightest market since the 8.4 percent mark in the third quarter of 2008.
Positive full-year absorption of 8.44 million sf was well above the positive 451,000 sf of absorption during all of 2013. Manhattan’s positive fourth quarter absorption of 1.13 million sf was significantly less than the third quarter’s positive 3.92 million sf, but essentially even with the positive 1.12 million sf a year ago.
The average overall Manhattan asking rent reached $66.52/sf in the fourth quarter, up 0.8 percent from $65.97/sf the previous quarter, and 10.0 percent higher than $60.46/sf a year ago. In fact, activity has been so robust that 20 leases total in Midtown and Midtown South were completed at starting rents of $100/sf or greater, including three leases at or above $200/sf.
Increasing supply contributed to an uptick in availability rates, negative absorption, and decreases to average asking rents, but 2014 was healthier than the year prior.
A number of large fourth quarter Midtown transactions contributed to 3.84 million sf in leasing activity, a 16.1 percent increase over the 3.3 million sf in the third quarter, but 22.9 percent below the 4.97 million sf a year ago. Full-year Midtown leasing of 15.7 million sf was slightly less the 15.8 million sf in 2013, yet still represents a strong year.
Despite the addition of several large blocks of space, the availability rate increased only slightly to 10.7 percent, up from 10.6 percent in the third quarter and still lower than the 11.2 percent in Midtown a year ago.
Fourth quarter absorption was negative 312,000 sf, a sharp reversal from the positive 1.88 million sf in the third quarter and the positive 795,000 sf a year ago. While full-year absorption was positive at 1.2 million sf, it was less than half of the positive 2.51 million sf during 2013.
The average asking rent dropped to $75.74/sf, down 1.3 percent from $74.78/sf in the third quarter, the first time the average asking rent decreased since the first quarter of 2013. However, that rate was 7.2 percent higher than the $69.73/sf average a year ago.
To reverse the negative slide from this past quarter, demand in Midtown will need to keep pace with increasing inventory of available direct and sublet space. Several known large vacancies from relocations will begin to impact the quarterly results in 2015.
Sustained demand for Midtown South space resulted in 2.94 million sf of leasing in the fourth quarter, 1.9 percent greater than the 2.89 million sf leased in the previous quarter and 33.0 percent higher than the 2.21 million sf leased a year ago. For all of 2014, Midtown South recorded 13.02 million sf of leasing, 54.4 percent more than the 8.44 million sf in 2013 and the highest total since 13.08 million sf in 2005.
Meanwhile, the Midtown South availability rate fell to 7.9 percent in the fourth quarter, down from 8.5 percent in the third quarter, and from 9.7 percent year-over-year. This was also Midtown South’s lowest availability rate since the 7.5 percent achieved in the third quarter of 2008, and the lowest of all three submarkets since 2010.
Midtown South’s 929,000 sf of positive absorption was a 20.4 percent increase from the positive 772,000 sf in the previous quarter, and a reversal from the negative 106,000 sf recorded a year ago. In addition, full year positive absorption of 3.0 million sf completely offset the negative 1.97 million sf of absorption during 2013. This was Midtown South’s strongest full year of positive absorption since 3.50 million sf in 2010.
Midtown South showcased three of Manhattan’s top leases this year, while crossing the $100/sf mark for the first time, with five transactions achieving that rate. Meanwhile, the average asking rent increased 5.7 percent to $61.50/sf, up from the $58.19/sf the prior quarter, and 11.2 percent higher than the $55.32/sf a year ago.
This marked the 16th consecutive quarter in which the average asking rent has risen in Midtown South — the longest period on record — while the fourth quarter level was only slightly below the highest-ever recorded $61.60/sf in the first quarter of 2008. It is likely that Midtown South average asking rents will soon surpass that level, as new office developments with above average asking rents are scheduled to be completed this year and owners continue to raise rates. Also, four of the top five Midtown South leases signed in the fourth quarter were relocations.
Downtown showed some regression, but was still historically strong in the fourth quarter. Downtown’s 1.52 million sf of leasing was 27.2 percent below the previous quarter’s 2.09 million sf, and 74.3 percent less than the 5.92 million sf leasing during the same period in 2013. And full-year leasing of 7.98 million sf was 17.7 percent less than the 9.70 million sf leased during all of 2013.
However, three of Manhattan’s top five leases signed in the fourth quarter were tenants relocating Downtown from Midtown or Midtown South. In addition, the availability rate declined to 11.7 percent, down from 12.2 percent the previous quarter and from 15.6 percent year-over-year, marking the sixth straight quarter of tightening availability.
Downtown’s positive absorption was 514,000 sf, less than half of the positive 1.27 million sf in the previous quarter, but 18.6 percent above the positive 433,000 sf of absorption year-over-year. Further, full-year positive absorption of 4.24 million was a significant improvement over the negative 93,000 sf of absorption in 2013.
As with Midtown South, Downtown is approaching uncharted territory, as asking rents in specific buildings have reached nearly previously unheard of levels. In fact, continued upwards re-pricing by landlords, plus the addition of several large blocks of space with above-average asking rents, caused the average asking rent to increase to $52.23/sf, up 1.0 percent from the $51.70/sf the previous quarter, a new all-time high average asking rent for Downtown. But as TAMI tenants predominantly replace the FIRE sector, demand will need to remain strong as new space is added to the available inventory.
“The overall Manhattan office market in 2014 showcased the strongest year we’ve seen since before the downturn,” said Joseph Harbert, Eastern Region President for Colliers International. “Midtown South continues to operate at record levels, while the evolution of Downtown and the Far West Side further set the stage for the decades ahead. In 2015, the overall inventory will likely increase, with new product coming online, but the impact to pricing may be offset by continued positive economic growth, a favorable investment sales market, and landlord confidence across all three submarkets.”