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Manhattan office market near turning point?

New report sees bottoming out of vacancies and asking rents; average rent seen as rising a modest 2.2% for the year as a whole.
March 24, 2010 12:27 PM
By James Comtois

The market for Manhattan office buildings is showing signs of a significant improvement from 2009, according to a report released Wednesday by CB Richard Ellis.

Although there will still be plenty of distress in the commercial real estate market for overleveraged owners and under-capitalized lenders, 2010 is seeing average prices for high quality office towers rise and capitalization rates—a property's net operating income divided by its acquisition price—improve. In addition, transaction volumes are expected to grow and commercial mortgage originations are expected to increase.

This report comes on the heels of an annual report released Tuesday by Moody's, which showed that New York's office sector was hit hard in 2009, with values falling 33% for the year.

According to CBRE's new report, not only is Manhattan office vacancy stabilizing, but average asking rents are as well. As of February, Manhattan office vacancy rate stood at 9.9%, up from a record low of 4.4% in May 2007. A spokesperson for CBRE noted that the important thing about the vacancy rate at this point is that its growth is slowing.

“Vacancy is up, but stable, which leads to more certainty,” said the spokesman. “Investors like certainty.”

Average asking rents for Manhattan office space also seem to be bottoming out. Asking rents were at $48.78 per square foot in February 2010, down from a high of $71.92 per square foot in July 2008.

For the year as a whole, CBRE forecasts that average office rents in the city will show a slight 2.2% uptick from 2009 levels. Driving that expected modest bounce will be stabilizing rents and vacancies—and a continued ebbing of fears of a systemic collapse.

CBRE also forecasts that the long-awaited flood of distressed assets hitting the market will not happen in 2010. Instead, the firm expects to see a mix of loan extensions, workouts, and sales.

“Some of the more dire predictions have not come to pass,” said the spokesman. “The economy is starting to come back out of the trough, and the rent stabilization is reflecting that.”



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