NY office market pulls further ahead of rest of US

* Manhattan office vacancy rate falls 0.4 pct in Q4

* Falls to 10.5 pct

* Overall U.S. vacancy rate above 14 pct

* Manhattan effective rent up nearly 10 pct

By Ilaina Jonas

NEW YORK, Jan 11 (Reuters) - The vacancy rate for the Manhattan office market, the largest in the United States, fell 0.4 percentage points in the fourth quarter as rebounding jobs in the financial sector and other industries helped Manhattan continue to outpace the overall U.S. office market.

The Manhattan office vacancy rate fell to 10.5 percent from 10.9 percent in the third quarter, according to a report by Cushman & Wakefield released on Tuesday.

That marked further recovery from a six-year high of 11.6 percent in the first quarter but was still way above the 5.3 percent Manhattan office lessors enjoyed in the second quarter of 2007.

The overall U.S. office market vacancy rate, still near its recent-years high of 15 percent, declined to 14.4 percent in the fourth quarter from 14.7 percent in the third. It had been as low as 9.7 percent just three years ago.

The U.S. office market picture reflected the uneven recovery in the job market with New York City and Washington, D.C., rebounding more quickly and strongly.

New York City has recovered 22.7 percent of the office jobs it lost to the recession, compared with 14.1 percent in the rest of the country, Cushman & Wakefield economist Ken McCarthy said. Washington, whose job losses were minimal compared with the rest of the country, has regained 91 percent. (For a graphic on the Manhattan office market: r.reuters.com/rex75r)

Manhattan leasing in the fourth quarter totaled 7.5 million square feet, the highest in more than four years, as businesses leased more space than they gave up.

By industry, the financial sector accounted for 29.5 percent of the leasing. The legal services industry, which last year accounted for 15.5 percent, slid further to just below 11 percent. Publishing, healthcare, education and social services also were active during the quarter.

RAISING THE RENT

The Manhattan vacancy rate is approaching the so-called equilibrium range -- 7 to 9 percent -- where landlords and tenants have equal footing negotiating rent. Above 9 percent is still a tenant's market, according to Cushman & Wakefield.

With little new construction and few new buildings opening, the market will get tighter in 2011, moving the advantage toward landlords, Cushman & Wakefield predicted.

In the fourth quarter, the average asking rent rose to $54.34 per square foot from $53.80 at the end of the third quarter, the first quarterly rise since the third quarter of 2008.

Still, net effective rent, which factors in months of free rent and other perks and is what landlords collect, rose to $46.33 per square foot, the highest since the first quarter of 2009 and up from $42.19 per square foot in the third.

Average asking rents for the highest quality buildings increased to $61.96 per square foot from $60.69 at the end of the third quarter, according to Cushman & Wakefield.

BUYERS

The relative stability of the New York market helped draw buyers. Sales for 2010 rose to $13.6 billion, up from $3.5 billion the year before. Midtown sales accounted for $9.5 billion of those deals, the real estate services firm said.

But even that remained less than half the $27.9 billion rolling five-year average, according to Cushman & Wakefield.

Among the larger sales was Google's $1.77 billion purchase of 111 Eighth Avenue, the largest single U.S. building purchase in 2010, according to Cushman & Wakefield.

Other sales underscored the foreign investor appetite for New York properties.

Canadian Pension Plan Investment Board purchased a 45 percent stake in 1221 Avenue of the Americas, also known as the McGraw-Hill Building, for $576 million.

Inmobiliaria Carso S.A. de C.V., an investment company controlled by Mexican billionaire Carlos Slim, bought 417 Fifth Avenue for $140 million earlier last year. (Editing by Gary Hill)