New York office leasing remains solid

PUBLISHED : Tuesday, 21 July, 2015, 11:12pm
UPDATED : Tuesday, 21 July, 2015, 11:12pm

Manhattan commercial real estate leasing posted another solid quarter at the end of June, with rising asking prices for office space and availability in decline, Colliers International said.

Sales of commercial real estate this year are on track for the biggest year since a record 2007, with foreigners accounting for 41 per cent of buying activity, Colliers said.

Foreign investors have made nearly US$5.5 billion in direct investment this year in New York, and could account for a fifth of purchases by the year's end, up from a more typical 12 per cent to 15 per cent, the commercial real estate broker said.

"It seems like foreign capital is taking over," said Andrew Nelson, the US chief economist at Colliers. "Why is that? It's because foreign capital likes to be in the top cities," where two-thirds of foreign money is invested.

Private equity firms accounted for 47 per cent of selling and only 29 per cent of buying.

Prices per square foot hit record highs for office space in the downtown and midtown south submarkets. But despite record levels of activity, the Manhattan market is not overheating, executives at Colliers said.

Cap rates, a common industry metric, are at historic lows and would suggest low returns and expensive prices, Nelson said. But he said the spread between cap rates and the 10-year US Treasury note had not compressed and the ability to pay leases was not stretched.

"What it really means is property is expensive on the price per pound, or price per square foot basis, but relative to the fundamentals and how much income the properties are generating, it's not very expensive," Nelson said.

"It's about average over the long haul," he said.

Rents for office space in Midtown Manhattan, by far the largest US market for offices, are US$77.93 per square foot, still below their 2008 peak of more than US$90 per square foot.

Manhattan experienced the seventh consecutive quarter of increasing leasing velocity and remains above the 10-year average. Leasing increased to financial services companies, a sign of a continuing economic recovery.

Overall leasing availability in Manhattan was just above 10 per cent. That was up more than 2 percentage points from the lows of 2007, just before the US housing bubble burst.

The midtown south submarket remained hot, with rents in renovated 100-year-old buildings almost the same as class A office buildings in midtown. Leasing activity rose 14.3 per cent from the first quarter.