According to Jones Lang LaSalle's Spring 2012 Skyline Review for New York, most of the gains in Manhattan's average asking rental rates over the past year can be attributed to increases in rates for the city's trophy buildings.
Starting rents in some of New York's trophy product surpassed $175 per square foot for the first time since 2008.
The Plaza District, typically the highest-priced submarket in Manhattan, posted average asking rental rates of $95.39 per square foot for trophy space in February 2012, a 30.3 percent increase in asking rents from the $73.32 per square foot recorded at the bottom of the market in 2010. The Spring 2012 Skyline Review noted, however, that the city continues to see a wide disparity in pricing. The Midtown trophy set saw more modest average asking rental rates of $89.12 per square foot in February 2012, a boost of 26 percent from rates of $72.11 per square foot at the bottom of the market. Downtown trophy asking rents have grown just 10.7 percent over the same time period to $51.56 per square foot, representing a more than 40 percent discount to the Plaza District.
Nationally, with just four regional markets adding minimal new developments, leasing demands continue to outpace supply; allowing landlords to scale back tenant improvement allowances by five percent while increasing rents by nearly three percent at top office properties. The annual North American Skyline Review from Jones Lang LaSalle also reports that heightened investor interest for this type of product caused activity to expand beyond gateways into secondary markets.
"Vacancy levels continued to drop nationally in trophy and Class A properties in 2011; yet, with the exception of markets spurred by technology, energy and healthcare demands, they have a way to go before witnessing the lows of 2006," said John Sikaitis, Director of U.S. Office Research. "However, net-effective rents in the U.S. increased with some markets witnessing double-digit growth. With limited supply in the pipeline, we anticipate to see this upsurge trend in rents continue."
Demand within the Skyline segment continued to outpace that of the overall U.S. office sector through the end of 2011 and into 2012. In total, the Skyline market absorbed 6.5 million square feet of space in 2011 and outshined overall market rates by 40 percent. Vacancy levels also dropped from a high of 15.7 percent to the current level of 14.7.
In addition, only four markets - Boston, Houston, Miami and Washington, DC - delivered a total of seven new buildings compared with the 2007-2010 annual averages of 17 new buildings across the U.S. Skyline. Looking ahead, the development pipeline appears just as equally barren with a total of eight buildings under construction, measuring 6.1 million square feet with New York and Washington, DC accounting for nearly 90 percent of the space currently under construction driven by the World Trade Center and CityCenter developments, respectively. Looking forward, large blocks of space will continue to come at a premium across most geographies and tenant leverage will continue to slip with almost no new supply.
Overall, asking rents jumped 2.9 percent in 2011 to an average full service rate of $37.35 per square foot while tenant concessions packages have lowered with improvement allowances down 5.0 percent in 2011 and rent abatement down 5.1 percent.
Investors continued to flood capital into core stabilized assets in 2011 with sales of Skyline assets increasing at nearly double the rate of overall U.S. office sales volume. In total, Skyline sales volume jumped 66.4 percent with New York, Houston, Chicago, Boston and Washington, DC registering sales volumes greater than $1 billion throughout the year.
Major Market Highlights
Of the 16 deals larger than 100,000 square feet signed in the CBD during the year, 15 were in Skyline buildings primarily resulting from relocations or expansions seeking quality upgrades.
The Downtown Skyline continued to outperform the rest of the Class A office market despite rising vacancy in key Trophy assets hit hard by the downsizing in the large energy, financial and legal services tenants.
Rental rates outperformed the overall market averaging $48.28 per square feet versus the market's $43.39 per square foot. Additionally, technology leasing activity continued as the driving force behind investment activity as sales volume reached its highest level since 2007.
The completion of the election cycle and more certainty surrounding the federal budget should help tenant demand in 2013.