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REAL ESTATE - Manhattan Rents Soar

Strong demand keeps analysts bullish despite record prices.

Rents on manhattan office buildings are rising as fast as the scaffolding in a boomtown. Although the pace is likely to cool now that rents are at record levels, the city's commercial real estate owners and brokers say demand remains strong and there is still upside potential for high-quality, well-located office space.

"With the overall healthy economy and the diversity of demand, this market is very different than the last peak, which was dot-com and telecom driven," says Howard Fiddle, vice chairman of CB Richard Ellis Group. "Tenants are legitimate companies with businesses that are household names that need more space to put their employees."

According to data from CB Richard Ellis, rents for prime office space in midtown Manhattan have risen by 36 percent over the past year, to an average of $79.85 per square foot. At the same time, rents in the financial district have risen 27 percent to an all-time high of $47 per square foot. CB Richard Ellis has been seeing asking rents -- the amount of money that landlords are demanding to lease space in a building -- of $150 to as much as $200 per square foot in newer buildings with views of Central Park.

Driving the jump in rent is a shortage of high-quality space, says Fiddle, who notes that the amount of available office space today is virtually unchanged since 1980. Although many new buildings have been erected in the interim, the September 11 terrorist attacks destroyed roughly 15 million square feet of office space at and adjacent to the World Trade Center, and a number of office buildings have been converted into condominiums. Says Fiddle, "Our market has been so incredibly supply-constrained."

The supply picture is slowly starting to change. The Port Authority of New York and New Jersey plans to build four large office towers at the site of the former World Trade Center, including the 2.6 million-square-foot Freedom Tower currently under construction. JPMorgan Chase & Co. agreed in June to build a 1.4 million-square-foot tower on the site. In Midtown, Vornado Realty Trust is planning to build a multimillion-square-foot tower across from Penn Station, and Boston Properties and SJP Properties are each planning large offices near the Port Authority Bus Terminal on Eighth Avenue. But none of these buildings are expected to be ready for several years -- the Freedom Tower isn't due to be completed until 2011.

Demand from banks, brokerages and other financial services firms is expected to continue to buoy the market, brokers say. "The financial services sector is less reactive to growth in rental rates," says Peter Hennessy, president of the New York office of Staubach Co., a Dallas-based property adviser.

Fiddle sees the importance of financial firms as a strength rather than a potential weakness. "New York is becoming more important to financial institutions, which will insulate the Manhattan marketplace," he says. Banks that have substantial technology needs are opting to pay more to be in buildings with better infrastructure, helping to boost rents for modern office space. "There are amazing electrical demands on buildings," Fiddle notes.

New York's strength is more than just Wall Street, though. Other sectors, such as law firms, media concerns and Fortune 500 companies, are contributing to the rise in prices. "The demand is very broad and diverse," says Fiddle. "The global, national and New York economies are all doing well. At some point the economy will change, but I feel like New York is in a better position than it's been in for a long time."

Even with all this demand, could the New York market be nearing a top? One warning sign: Rental rates have risen for five consecutive quarters. Historically, Manhattan office rents have never posted increases for more than six quarters in succession before retreating. "We think we are getting close to the end of this growth cycle," acknowledges Hennessy. He believes that rents will rise further, but at a more-moderate pace than over the past year.

Despite the increase in rents, New York remains a bargain compared with such cities as Hong Kong and London. According to data from NAI Global, a Princeton, New Jersey°©based real estate services firm, prime office space fetches $260 a square foot in Hong Kong and $204 in London.