Manhattan office vacancy rate jumps in third quarter

NEW YORK Tue Oct 7, 2008 2:35pm EDT

NEW YORK Oct 7 (Reuters) - The Manhattan office market vacancy rate hit a two-year high in the third quarter after the credit crisis crippled some of its biggest tenants and heaped extra space onto a market that is expected to worsen soon.

Office vacancy in Manhattan, home to some of the largest U.S. banks and insurance companies, rose to 7.4 percent, up 0.3 percentage points from the previous quarter and 1.7 percentage points, or 30 percent, from a year earlier, real estate research company Cushman & Wakefield reported on Tuesday.

"We think vacancy is really going to jump up pretty quickly to 9 or 10 percent by the end of the fourth quarter, the beginning of the first quarter" Joseph Harbert, chief operating officer of Cushman & Wakefield's New York Metro Region, said.

That will give tenants more power to negotiate rent.

Available sublease space rose 72 percent year-over-year, the biggest increase in nearly four years. At the end of the third quarter, 6.5 million square feet were available for sublease, up from 3.8 million square feet last year.

Financial services typically generate a third of demand for Manhattan office space. They also pay some of the highest rents.

But since the near-collapse of Bear Stearns and American International Group Inc (AIG.N), the bankruptcy of Lehman Brothers Holdings Inc LEHMQ.PK, and the pending buyout of Merrill Lynch & Co Inc MER.N, the sector now accounts for just 30 percent.

That is expected to shrink even more as consolidation plans by buyers, such as Bank of America Corp (BAC.N) and JPMorgan Chase & Co(JPM.N) and Barclays PLC (BARC.L), make their way to office space use.

"There's more space to come onto the market," Harbert said. "It's just too soon to know how much."

Year to date, leasing is down 14.4 percent to 15.7 million square feet the lowest level since 2003.

The net change in occupancy was a negative 2.9 million square feet, compared with a negative 468,091 square feet last year.

Overall asking rent was $72.97 per square foot, a 2 percent increase from midyear. Harbert attributed the rise in asking rents to the fact that the most expensive space is returned to the sublet market and the more attractively priced space tends to be leased.

"I see the inflection point of the market, in terms of the top of the market, as August 2008," Harbert said. "We're now at the flat part and we think that asking rents will go down, taking rents have already gone down.

Asking rent is the face landlords put on to the public, and represents the rent they try to achieve.

Effective rent, the rent which includes months of free rent and other perks designed to lure tenants, tends to be about 5 to 7 percent lower. Currently that discount is running about 10 percent or more Harbert said.

For space in better buildings, landlords have lowered effective rents, especially for tenants renewing leases, by 15 to 20 percent, Jonathan Serko, executive vice president of office leasing in Midtown, said.

Rental rates overall will come down by 15 to 20 percent by the end of 2009, Harbert said.

As far as building sales, the lack of credit has taken out the air of the hottest U.S. commercial real estate market. Sales greater than $10 million were off 55 percent from last year. Manhattan property sales closed and under contract at the end of third quarter totaled $18.7 billion, compared with $42.4 billion at the end of the third quarter of 2007.

Foreigners were the most active investors year-to-date, accounting for nearly 40 percent of sales closed and under contract. So far this year, overseas investors have spent $7.4 billion for Manhattan properties, up from $5 billion last year. (Reporting by Ilaina Jonas, editing by Dave Zimmerman)

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