Manhattan office market in Aug strongest since 2001

By Ilaina Jonas

NEW YORK (Reuters) - The Manhattan office market in August was its strongest since before the September 11, 2001 attacks, despite the upheaval in the credit markets, according to a report by real estate services company Colliers ABR.

A series of deals for smaller and mid-sized office space slashed the vacancy rate to 6.7 percent, down from 6.9 percent in July and 8.3 percent in August 2006, according to Colliers. The average asking rent rose 0.9 percent to $62.34 per square foot from $61.78 in July and $47.21 per square foot in August 2006.

"It's not surprising that we didn't have a bad month," said Robert Sammons, managing director of Research. "What was surprising was that it was so good."

Problems in the residential subprime mortgage market caused the credit markets overall to back up as investors who buy bonds based on mortgages balked at purchasing all kinds of credit after subprime borrowers began defaulting on their loans.

The turmoil caused mortgage originators such as American Home Mortgage Investment Corp to shutter their doors and have lead to more than 50,000 job losses in the U.S. mortgage industry.

Although Wall Street has seen some job cuts related to the subprime market, New York's financial services industry, the largest driver of office space demand, has been largely resilient.

"It's going to take a while for it to work through the system," Sammons said. "It's kind of a bottom up situation. The jobs here are the top tier."

Even so, there were signs of caution. Lehman Brothers Holdings Inc did not exercise its option to take additional space at 399 Park Ave., Colliers said. Macquarie Bank Ltd, Australia's top investment bank, postponed its impending space search, the report said. Two of the bank's hedge funds suffered losses as a result of the subprime meltdown.

The pain may surface by the end of the year, Sammons said.

Yet unlike the real estate collapse in the late 1980s and early 1990s, any distress is likely to be much less severe given the extremely low vacancy rate and the drought of new development over the past 12 months.

"No matter what happens, we're going into any kind of situation in a very good position," Sammons said.

Vacancy for Class A buildings -- the most desirable sky scrapers often sought by the financial services industry -- saw vacancy fall to 5.1 percent from 5.6 percent. The average asking rent rose 1.4 percent to $83.14 per square foot from $81.98 in July.

The Midtown Class A market saw vacancy fall 0.40 percentage points to 5.2 percent and asking rent rose 1.6 percent to $94.51 per square foot from $93.04 in July.

Midtown South held its 7.2 percent vacancy rate, while eking out a small rise in asking rent, to $45.74 per square foot from $45.50 in July.

Downtown Class A vacancy fell to 4.9 percent from 5.3 percent in July. It was the first time since April 2001 that the Downtown market, which was devastated by the attacks on the World Trade Center, saw the rate dip below 5 percent.