By Ilaina Jonas
NEW YORK (Reuters) - Manhattan office leasing in the first quarter fell to its lowest level in two years, as rise in demand from information and technology companies failed to offset a retreat by financial institutions, according to a report released Tuesday.
Leasing activity in the first quarter fell 24 percent, to 5.8 million square feet from the 7.6 million square feet leased in the first quarter 2011. It was the lowest volume of leasing since the first quarter 2010, Cushman & Wakefield said.
The Manhattan office market was a buzz of activity a year earlier, as companies became optimistic about the U.S. economy and what it would mean for hiring. Troubles in Greece, however, the stress in the financial markets, the economic slowdown and the standstill in Washington darkened the mood.
"Essentially, we saw businesses start to get a little more cautious in the second half," said Ken McCarthy, Cushman & Wakefield senior economist. "Deals that were in the pipeline were closing, but we did not see new stuff come in. I think we're now feeling the effects of that."
At the end of the first quarter, the overall Manhattan office vacancy rate stood at 9.1 percent, flat compared with the prior quarter and down 0.9 percentage points year over year.
Media and information companies leased 28 percent of the 5.8 million square feet of office space companies took up, surpassing the 26 percent financial firms leased, according to a report by real estate services company Cushman & Wakefield. The average asking rent for Manhattan office space reached $58.90 per square foot at the end of March, up 7.6 percent year-over- year.
Midtown South, also known as "Silicon Alley," saw its vacancy rate fall to 5.9 percent, down from 6.4 percent from last quarter. For the top quality buildings in that market, the vacancy rate was 4.6 percent. Asking rent in those buildings also grew the fastest, up 33 percent year over year to $67.52 per square foot.
Yet in Midtown, by far the largest Manhattan office market, the vacancy rate rose to 9.9 percent, from 9.6 percent in the fourth quarter. It was down from 10.3 percent in the first quarter 2011.
Much of the rise was due to an increase in sublease space as large companies, including banks, dumped unused leased space back onto the market in order to recover some of their rent obligation. "I'm not concerned about it yet, but I'm sure going to be watching what happens particularly in the sublease market, McCarthy said.
In Midtown, the average asking rent rose only 2 percent from the prior quarter to $66.70 per square foot. Asking rent at the most desired buildings rose 6.4 percent over the year to $72.08 per square foot.
The downtown office market ended the quarter with a vacancy rate of 9.2 percent, down from 9.5 percent in the fourth quarter. Asking rents rose 1.2 percent to $40.37 per square foot. For the most desired buildings, asking rent rose 5.1 percent to $45.24 per square foot.
As far as sales of Manhattan buildings, apartments buildings lead the way, accounting for $1.5 billion, or 27 percent of the total property sales at the end of the quarter, up from $720 million last year.
At the end of the first quarter, total building sales reached $5.7 billion of sales, on par with last year. About $1.5 billion of sales were under contract, the report said.
(Reporting By Ilaina Jonas, editing by M.D. Golan)