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Regardless of the relative health of the New York City office market and its future as a location for new office development, it has accomplished a great deal to date. With a market that contains almost 300 million square feet of Class A office space, New York City has the largest office market in the United States. Additionally, as New York City has been producing skyscrapers almost as long as any other city, the total size of the market including older office space (Class B and C) is also the largest in the United States at approximately 550 million square feet. What follows is a review of the current state of the New York City office market broken down by class and sub-market. Rental rates and vacancy rates are also broken down into direct and sublet categories. A brief summary of the major developments to watch is also included.

The Manhattan office market is still the largest in the nation by a significant margin. The Manhattan office market is more than 50 percent larger than the next largest office market (Los Angeles) and that calculation is before one includes office space in neighboring areas such as Long Island, Westchester, southern Connecticut, and northern New Jersey.

Whereas yesterday's futurists worried that the greatest threat to Manhattan's dominance would come from other American cities, today the threat to Manhattan comes from within New York City metropolitan area. The New Jersey waterfront has grown in only a matter of years to surpass Brooklyn in total office space. Additionally, the office space along the New Jersey waterfront is far superior to that in Brooklyn (or any other borough except for Manhattan). Over 75 percent of the New Jersey waterfront office space is Class A space (16.4 million square feet). By way of comparison, Brooklyn and Queens have only 6.5 and 4.6 million square feet of Class A office space, respectively.

At this time, there is little new development under way in the city. When the cycle picks up again, where will the new development go? If the new development occurs in New Jersey where land is relatively inexpensive and easy to assemble, the dwarfing of Brooklyn and Queens will continue and they will fall behind in the competition to be a successful back office location. Projects such as Metrotech and Queens West (Long Island City) that were once seen as far-sighted will be remembered as little more than attempts to forestall the inevitable. If the New Jersey waterfront continues to grow, the next milestone to surpass is not the outer boroughs - the next milestone is Midtown South.

The source for the following data is from CoStar.

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In the second Quarter of 2000 during the height of dot-com madness, the Class A vacancy rate fell to 1.8 percent. This rate was so low that it was pushing up against the physical barrier of the structural vacancy rate. Structural vacancy is typically defined as vacancy that cannot be avoided because regardless of a landlord's or tenant's desires, there is always some downtime because lease end and start dates between old and new tenants never perfectly coincide.

The days of structural vacancy issues are long gone. The loss of jobs in the FIRE sector (e.g., finance, insurance, and real estate) has hit midtown hard. While a Class A vacancy rate of 8.7 percent (1st Quarter 2003) may not strike a non-New Yorker as particularly large (i.e., in many cities, a vacancy rate of below 10 percent is considered healthy), in a midtown market of 285 million square feet, an 8.7 percent vacancy rate is almost 25 million square feet. To put that in perspective, each tower of the World Trade Center was 4.75 million square feet.

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Midtown-South has traditionally been midtown's poor neighbor, but during the height of the market, Midtown-South was almost as expensive as midtown. Now that there is pronounced weakness in the downtown market, Midtown-South has picked up tenants in search of a bargain that do not want to locate to downtown. It is the low-cost option for companies that desire to remain in Manhattan but do not want to locate downtown.

As a result of the overall weakening of the market, Midtown-South has seen its asking rents drop much more than midtown as it resumes its position as the low-cost option. The asking rent for Class A space in Midtown-South (First Quarter, 2003) is $37, down from a high of $60 at the end of 2000. In comparison, midtown's Class A asking rents dropped from $66 to $56 over the same time period.

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Downtown is a different market today than it was before 9/11. Before 9/11, downtown was considered to be a viable location for office tenants looking for a headquarters location. During the dot-com madness in 2000, the Class A vacancy rate dropped to as low as 2.6 percent. While not as low as Midtown's Class A vacancy rate of 1.8 percent, it was nonetheless stunningly low. However, due to relative restraint on the part of lenders, new construction was limited throughout the city. What construction might have taken place downtown occurred instead in New Jersey where there was plentiful land and sites could be quickly assembled.

Today, downtown is in serious trouble. The Class A vacancy rate is 11.90 percent and those new buildings in Jersey City are effectively competing with downtown for tenants. The one bright spot is that older office buildings are being converted to residential use (and the residential conversion is eligible for tax abatement under the city's 421-g program as long as the new units are rental units). Unless the city's office space demands grows in the near future and the demand for inexpensive housing abates, many more buildings will be converted to residential use.

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New Jersey Hudson Waterfront Office Market Autumn 2003

At first glance, it would appear that the vacancy rate in New Jersey is far in excess of the other three Manhattan submarkets. However, one should note that the New Jersey market is relatively small in comparison. With only 21.5 million square feet of office space (Class A, B, and C), it is less than 5 percent of the combined office space in midtown, Midtown South, and downtown. On account of the small size of this market and the large size of the buildings (there are only 45 Class A buildings in this market that contain 16.4 million square feet), it is extremely volatile in comparison to the rest of the New York City marketplace.

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