Manhattan office market's first-quarter rents rise

By Ilaina Jonas

NEW YORK, April 8 (Reuters) - Asking rent for Manhattan office space rose in the first quarter, despite the vacancy rate inching up and a slowdown in leasing, especially from the cash-strapped financial sector, according to real estate research firm Cushman and Wakefield.

Overall asking rent in Manhattan rose 25 percent over last year's first quarter to $67.13 per square foot. For the most desirable buildings, rent rose 23 percent to $79.78 per square foot.

At the same time, the Manhattan vacancy rate rose to 6.1 percent, up from 5.7 percent in the fourth quarter of 2007. Leasing activity also slowed to 5 million square feet in the first quarter, down 8 percent from the 5.4 million square feet in the first quarter 2007.

Several large Manhattan-based financial services firms, such as Citigroup, plan large layoffs. Thousands also are expected to lose their jobs as a result of JPMorgan Chase's acquisition of Bear Stearns.

Still, Manhattan may not see lower asking office rents until layoffs actually occur and companies decide whether to keep the space in case of a quick rebound or sublease it.

"The dynamic that may lead to that, to owners adjusting their prices in terms of their asking prices, would be a huge amount of sublet space coming on the market," said Joseph Harbert, Cushman & Wakefield chief operating officer, New York Metro Region.

The resiliency may help some publicly traded landlords such as SL Green Realty Corp (SLG.N), Vornado Realty Trust (VNO.N) and Brookfield Properties Corp (BPO.TO).

Additionally, the composition of space available to rent -- how much is from high-end buildings or low-end buildings -- also will determine the overall asking rent.

Boosted by Ogilvy & Mather's lease for 564,000 square feet at 636 11th Ave., advertising agencies accounted for 15.8 percent of all new leases in the first quarter, up from 6.4 percent in 2007.

The financial sector, which traditionally comprised about a third of new leases, accounted for only 15.3 percent, as banks confronted the upheaval from the credit crisis.

With debt difficult to obtain and expensive when available, sales of office buildings either under contract or closed in the first quarter fell to $5.1 billion, down from $48.5 billion the prior year.

Debt, which last year comprised sometimes 95 percent of the purchase price of a building, now accounts for only about 65 percent or 75 percent, when available.

As private equity and individual buyers left the market, foreign investors sought to cash in on the cheap dollar and accounted for 45 percent of sales that either closed or were under contract during the first quarter -- a huge jump from 15 percent in the first quarter 2007.

European investors, who had recoiled from the high price of U.S. office buildings, especially in New York, are returning, said Scott Latham, Cusham & Wakefield's executive vice president, capital markets. They're being joined by sovereign wealth funds and private buyers.

New York, the most expensive U.S. city, ranks No. 10 in the world for the cost of doing business, according to Cushman & Wakefield.

"There is a lot more international traffic in this market now than I've ever seen in my career," Latham said. "On a risk-adjusted basis we are probably at the top of the shopping list globally." (Editing by Gary Hill)