Jones Lang LaSalle


Manhattan to run out of office space: report
by Julie Satow
March 08, 2006

Demand for Manhattan office space will outstrip the existing and projected supply in seven years, according to a report by CB Richard Ellis.

Demand for Manhattan office space will outstrip the existing and projected supply in seven years, making development in Lower Manhattan and on the west side necessary, according to a report by CB Richard Ellis.

With office employment estimated to grow by 1.4% a year, the brokerage firm projects that vacancy rates will decline to below 5% by 2008 and to below 3% by 2009. This supply constraint will push up rents, with average asking rents reaching as high as $90 a square foot by 2010. The projections do not consider economic factors such as inflation and interest rates.

"With vacancy rates declining, rents increasing and few new construction projects on the horizon, our ability to keep pace with future business growth in the city is threatened," said Mary Ann Tighe, the chief executive of CB Richard Ellis for the New York Tri-State region.
The brokerage said the office shortage makes development of the World Trade Center site and at the Hudson Yards on Manhattan’s west side necessary. The Ground Zero project is bogged down by the rift between leaseholder Larry Silverstein and the Port Authority of New York and New Jersey, which owns the site. Commercial development on the west side awaits transportation improvements.

In Midtown, an average of 9.1 million square feet of office leases is expected to expire annually over the next 10 years, the report released Wednesday says. That means that about 500 tenants will face expiring leases and new rents that are as much as 60% higher than they currently pay. Tenants could be forced to leave New York to find cheaper office space.
The market "is strong, but that very strength could portend challenges to retaining its office employee base," said Ms. Tighe.

While demand is expected to increase, office construction has fallen in the past six years. While an average of 4.2 million square feet was constructed every year since 1950, since 1990 that number has dropped to only 1.2 million square feet a year. The rising cost of construction materials and labor, as well as a dearth of construction sites in Midtown means the trend will continue, the report says.

Excluding the World Trade Center, there are only 8 sites in Manhattan large enough to allow as-of-right construction of a one-million-square-foot office building, according to CB Richard Ellis. Considering that some of those buildings will be residential and that only two are near transportation hubs -- the Farley Post Office and Penn Plaza -- and the number of developable plots is even scarcer, the report says.