01/18/2012 04:15 pm ET Updated Mar 19, 2012

Media And Tech Startups Drive Manhattan Office Surge: Report

(Reuters) - Manhattan, arguably the financial capital of the world, has media and technology companies to thank rather than banks for its improving office market, according to a report real estate services company CBRE Group Inc (CBG.N) released on Wednesday.

Featuring the likes of social media firms FourSquare and Mashable, online advertiser Yodle and computer software company AppNexus, the technology/media industry has become a powerful tenant force in Manhattan that has given Midtown South -- long an afterthought market -- the lowest vacancy rate in the nation.

Just a few years ago, the market and its older buildings were considered a fall-back when a tenant was squeezed out or couldn't afford to be in Midtown.

"It's all very different now," said Mary Ann Tighe, chief executive officer of CBRE's New York Tri-State Region.

Across Manhattan and its roughly 400 million square feet of office space, the tech/media sector accounted for 13 percent of leasing in 2011, up from 11 percent in 2005, according to CBRE. Meanwhile, the finance industry's clout accounted for 26 percent of leasing down from 29 percent in 2005.

The tech/media-driven Midtown South market, bounded by 30th Street from river to river south to Canal Street, includes Union Square and Tribeca, Park Avenue South, and the Flatiron neighborhoods. It ended 2011 with an availability rate -- the amount of space being marketed and ready to renovate within 12 months -- at 8.8 percent, down from 12.5 percent a year earlier and the lowest in six years.

Lower vacancy or availability rates telegraph future rent spikes as the supply of rentable space is absorbed. The average asking rent in Midtown South was $45.34 per square foot, about on par with the $43.64 at the end of the prior year.

Meanwhile, Midtown, the largest office sub-market in Manhattan, remains in flux. Its traditional tenant base -- banks, hedge funds and private equity companies -- is preoccupied with banking regulations, European debt problems and the election outlook. The firms have put their demand for more space on the back burner until they can get more visibility into their hiring needs.

Concessions are still on the tenant side in Midtown. The amount landlords had to kick in to build out raw space to suit new tenants averaged $50.89 per square foot at the end of the year. The average amount of free rent was 7.04 months. That compared with Midtown South, where build-out costs to the landlord averaged $43.91 per square foot at the end of the year and months of free rent were 6.59.

"Midtown is trying to find its footing," said Gregory Tosko, vice chairman of CBRE's New York Consulting Group.

Midtown ended 2011 with an availability rate of 11.3 percent, down from 12.2 percent a year before but vastly higher than the 7.8 percent of 2007, before commercial real estate softened. Average asking rent rose to $62.43 per square foot, up from $55.98 a year earlier but more than $20 a square foot off 2007's average asking rent.

During the year, the number of sales of office buildings topping $30 million or more rose to 58 valued at $14.2 billion, up from 44 valued at $8 billion in 2010. The average price rose to $532 per square foot, up from $482 per square foot, but still trailed the peak reached in 2007 of 128 sales valued at $38.6 billion, or $741 per square foot.

(Reporting By Ilaina Jonas)

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