New York's office market remains in equilibrium.(Sales & Leasing)

The ongoing uncertainty in the financial markets has begun to impact New York's office market, with vacancy rates on the rise over the past several months. However, all three of Manhattan's markets remain in equilibrium, and average asking rental rates continue to post moderate increases.

Available space throughout the Midtown office market has increased nearly 3 million square feet in 2008. Midtown's overall vacancy rate increased to 8.8 percent in August 2008 from 7.6 percent in January. The last time Midtown's overall vacancy rate exceeded 8 percent was at the end of 2004. Class A vacancy rates expanded to 8.6 percent from 7.7 percent since the beginning of the year.

Despite the increase in available space, average asking rental rates in Midtown continue to escalate, albeit at a measured pace. Pricing among Midtown's Class A properties has increased by only 3.5 percent since January. As a comparison, Midtown Class A rents grew by more than twice that amount--7.3 percent--during the first eight months of 2007. Average overall rents increased to $84.39 per square foot in August from $83.33 per square foot at midyear 2008. Class A rates rose to $96.50 per square foot from $95.08 during the same time period. The rent boost was largely attributable to the addition of more than 400,000 square feet of Class A office space at 120 Park Avenue that is priced above the market average.

Vacancy rates in Midtown South have increased significantly since reaching a low point in the latter half of 2007. Overall vacancy rates increased to 6.6 percent in August from 3.9 percent in the third quarter of 2007. Additional space at 330 Hudson Street helped propel the growth in available space. Consequently, Class A vacancy rates in Midtown South climbed to 5.8 percent from 2.1 percent over the same span of time.

Class A office buildings in Midtown South posted gains in average asking rental rates during the past few months, reaching $65.84 per square foot in August from $62.67 at midyear 2008. Rents can vary widely from quarter to quarter, given Midtown South's limited amount of Class A inventory. Class A asking rents recorded a drop over the past eight months to $65.84 per square foot in August from $69.19 at year-end 2007. Overall rents increased slightly to $54.84 per square foot in August from $54.71 at midyear 2008.

Vacancy rates for Downtown New York office space reached recent lows in the second half of 2007 and have been slowly increasing since then. Overall vacancy rates rose to 8.5 percent in August from 7.5 percent at year-end 2007. Class A vacancy rates in Lower Manhattan increased to 7.6 percent from 5.8 percent during the same time period. The addition of more than 200,000 square feet of office space at One World Financial Center contributed to the growth in vacancy rates.

The extra space also caused the first drop in Class A average asking rents in Lower Manhattan since March. Class A rents slipped to $54.79 per square foot in August from $55.16 per square foot at midyear 2008. Overall rents fell to $51.14 per square foot from $51.22 per square foot during the same time period. While the market continues to trade rumors that large blocks of space are about to be placed on the market, there has been no sudden onslaught of sublease space. In the 12 months between mid-year 2007 and mid-year 2008, the Manhattan office market has seen sublease space increase only 4.6 percent to 8.3 million square feet. Comparatively, at the lowest point of the previous downturn--2001 through 2004--New York had a total of 14.37 million square feet of sublease space added to the market.

If more space is added to the market in upcoming quarters as expected, vacancy rates will continue to increase through early next year. Increases to average asking rental rates may continue if the space added to the market is of high-quality and if long-term sublease space does not account for a significant amount of availability.

BY JAMES DELMONTE

VP/DIRECTOR OF RESEARCH

JONES LANG LASALLE