Manhattan Office Market is Down Unless Its’ Not

I once worked with a foreign currency advisor who each week put out a newsletter that said the dollar might go up or it might go down although there is a chance that it might stay the same. Apparently predicting the NY office market is similar. Personally I lean towards the down.

Too Early to Put Manhattan Office Market in the Tank: CBRE – Commercial Property News – Paul Rosta – 08 October 08

Manhattan’s office market is coming back down from the stratosphere, but reports of an impending crash are greatly exaggerated, top executives from CB Richard Ellis Inc. argued at a morning briefing today.

“Right now, there’s a perception that this market is dead or dying, and that’s not true,” declared Stephen Siegel, chairman of global brokerage for CBRE. Although leasing velocity is undoubtedly slowing, major tenants are signing leases. He cited a 260,000-square-foot renewal and expansion by Macquarie Group, the Australian financial services concern, at 125 West 55th St. in Midtown. Details were confirmed yesterday in a press release issued by Cushman & Wakefield Inc., which represented Macquarie in negotiations with owner Boston Properties Inc.

Siegel ticked off other high-profile tenants who have either recently signed deals for big blocks of space in Manhattan or are thought to be in the hunt: NBC, the National Basketball Association, the National Football League and the global law firm Orrick, Herrington & Sutcliffe L.L.P.

Siegel argued that the recent diversification of Manhattan’s economy will help the office market as financial services companies reorganize and adjust to new space needs. Such industries as media, entertainment, advertising and technology will continue to create demand, Siegel argued. Many of Manhattan’s top landlords are in sound enough shape financially that they can ride out current conditions.

CB Richard Ellis’ research concluded that 80 percent of Manhattan’s top 65 office owners used less than 75 percent leverage to buy or refinance their properties. That will give owners the flexibility to temporarily leave space vacant rather than leasing it at a big discount and driving down prices.

Although the demise of former Wall Street pillars like Bear, Stearns & Co. and Lehman Brothers Holdings Inc. will return space to the market, the potential impact of layoffs in the financial sector and other industries must be seen in context, said Simon Wasserberger, senior vice president of CBRE’s New York City metropolitan regional consulting group. Tenants take a more sophisticated approach to subleasing space today than they did in previous decades, Wasserberger pointed out. For example, some firms prefer to retain unused space during a downturn because they may want it again in a few years when business improves and they want to expand.

Wasserberger also offered different scenarios for how layoffs would affect vacancy and pricing. If Manhattan were to shed 97,000 office jobs, vacancy would still reach only 9.6 percent, Wasserberger said. In a worst-case scenario of 145,000 lost office jobs, vacancy would hit 12.5 percent by 2011. And the trends of three previous major recessions dating back to 1970 suggest that those layoffs would eventually drive down average asking rents in Manhattan by 26 percent over the next three years, to $52.33. Although that would be consistent with historic trends, Siegel expressed skepticism that job losses in Manhattan’s financial sector would be enough to push office-sector layoffs to the worst-case total.

Balance Tips Toward Tenants in Manhattan: Cushman & Wakefield’s Harbert – Property Commercial News – Palu Rosta – 07 October 08

Hard numbers are confirming what real estate professionals have suspected for months about the nation’s largest office market. According to Cushman & Wakefield’s third-quarter report, Manhattan is showing the clearest signs yet of softening since the credit crisis began last year.

By most measures, the balance of power is finally shifting away from landlords. “If you’re a tenant, it’s a good time to be out there,” said Joseph Harbert (pictured), COO for the firm’s New York City metropolitan region, at a briefing this morning. “If you’re a credit tenant, it’s a great time to be out there.”

Vacancy in all office classes ticked up to 7.4 percent in the third quarter, from 5.7 percent only a year ago. By the end of this year or early 2009, vacancy in Manhattan could hit 9 or 10 percent, Harbert estimated.

Plenty of other indicators underscore Harbert’s point. Leasing activity for all Manhattan submarkets has dropped 14.4 percent so far this year compared to the first three quarters of 2007. Negative absorption at the end of the third quarter reached 2.9 million square feet, dwarfing last year’s third-quarter total of 468,091 square feet. Available sublease space also took a huge jump, hitting 6.5 million square feet at the end of the third quarter–the highest total in three years. And many more big blocks of space are available–83 blocks larger than 50,000 square feet were on the market by the end of the third quarter, up from 60 a year ago.

Financial services firms help anchor the Manhattan office market, but the economic slowdown is taking a toll. Even though financial companies were still the single most active category of tenants in the leasing market, their share of new leasing slipped from 35.6 percent during the third quarter of 2007 to just 19 percent last quarter.

Office-sector employment in Manhattan sustained a net loss of 3,800 jobs through the first eight months of the year, The financial services sector shed about 10,000 jobs between March through August, a number that will only increase as the shock waves from the industry’s crisis spread.

Manhattan rents tell a complex story. Rents continued to edge up from mid-year, increasing $1.38 per square foot to $72.97 overall during the third quarter. That seems like an anomaly at a time when negative absorption and vacancy are on the rise. But Harbert explained that much of the space that has recently come on the market is on the higher end of the price scale, which is helping to keep rents from tumbling.

But the flip side is that rent growth has flattened out and will probably reverse. “The lag time for prices to adjust is longer than we think,” Harbert explained. Prices could decline between 15 and 20 percent by the end of next year, a trend that would be consistent with earlier slowdowns. During the recessions of 2000 and the early 1990s, Manhattan office rents only hit bottom three years into the cycle, noted Ken McCarthy, the New York City region’s managing director for research.

New York’s Top Office Vacancies Jump 43% on Layoffs – Bloomberg – David M. Levitt – 07 October 08

The amount of prime New York City office space available for rent rose 43 percent in the third quarter from a year earlier, as Wall Street firms fired employees and sought tenants for space they no longer need.

The vacancy rate for so-called Class A space, offices with the most amenities and most modern infrastructure in locations such as Park Avenue or the Avenue of the Americas, has reached an “inflection point,” said Joseph Harbert, chief operating officer for the New York region at brokers Cushman & Wakefield, which issued a report today on the city’s commercial real estate.

“We think asking rents are going down,” Harbert told reporters at a briefing today. “Taking rents have already gone down.” (Taking rents are the rents actually paid by renters.)

Manhattan’s financial services industry had rented one out of every three square feet of space in the U.S.’s most expensive office market until this year, and its shrinkage will have an “enormous impact,” on the market, said Kenneth McCarthy, Cushman’s managing director for New York research. Lehman Brothers Holdings Inc. declared bankruptcy, and Merrill Lynch & Co. agreed to be acquired by Bank of America, while the Dow Jones Industrial Average is down 13 percent through yesterday since Sept. 15, the day both firms announced those moves.

Space Returning

“Certainly no one is in growth mode right now, except maybe bankruptcy lawyers,” McCarthy said. “And that means that the amount of space already coming back to the market has increased substantially and is likely to increase more.”

Vacancies for Class A space rose to 7.7 percent in Manhattan, up from 6.9 percent in the second quarter and 5.4 percent a year ago. There’s 18.5 million square feet for rent, up from 12.9 million feet a year ago, according to Cushman statistics.

The overall vacancy rate for Manhattan, including less-select B and C-class properties, was 7.4 percent, up from 7.1 percent in the second quarter and 5.7 percent a year ago. The last time the vacancy rate was this high was the second quarter of 2006, according to the report.

Nationwide, the office vacancy rate reached 13.6 percent in the third quarter from 13.1 percent in the second quarter, according to a report released Monday by Reis, Inc. a New York- based provider of real estate data.

“We’ve moved, particularly in the past month, into a market where landlords are doing everything they can to try to make transactions happen,” McCarthy said in an interview.  “If that means lowering rents or offering more concessions, they are willing to do it.”

Sublease Space Rises

Of 29.2 million square feet available in the city, 6.6 million square feet, or 23 percent is sublease space, or space put on the market by tenants, rather than landlords. That’s a 72 percent jump from the amount of sublease space available a year ago, the biggest jump in four years, according to the report.

A rise in sublease space tends to depress rents, since tenants don’t have the incentive to seek top dollar for their space as landlords do, McCarthy said.

Among the biggest subleases currently available is Goldman Sachs Group Inc.’s 599,000 square feet at 77 Water St. in lower Manhattan, Lehman’s 143,000 square feet at 399 Park Ave. in Midtown, and Royal Bank of Scotland Group Plc’s 143,000 square feet at 7 World Trade Center, the only building at Ground Zero rebuilt after Sept. 11, 2001, according to Colliers ABR, a competitor of Cushman.

Asking Rents Rise

Average asking rents continued to rise, to $72.97 a square foot, up 1.9 percent since the second quarter. Asking rents, or rents that landlords advertise for space, don’t reflect concessions landlords may make, including months of free rent or assumption of some improvement costs.

Manhattan office rents have risen 85 percent since the fourth quarter of 2004, when they reached a post-Sept. 11 low of $39.55 a square foot.

Rents in Midtown rose 0.6 percent to $84.48 a square foot; rents downtown rose 0.3 percent to $50.89 a square foot; rents in Midtown South, the area roughly between Canal and 34th streets, rose 1.9 percent to $54.23.

Vacancy in Midtown rose to 7.8 percent, from 7.1 percent in the second quarter. In lower Manhattan, vacancy fell to 7.3 percent from 7.7 percent, and in Midtown South, vacancy rose to 6 percent from 5.9 percent.

Colliers, in a report to be released today, said the “saving grace” in the New York market is the fact that very little new office space is being built in the city, with only 3.4 million square feet in a 443 million square-foot market expected to come on line next year.

Failed Deals Replace Boom in New York Real Estate – New York Times - Charles V. Bagli – 30 September 08

After seven years of nonstop construction, skyrocketing rents and sales prices, and a seemingly endless appetite for luxury housing that transformed gritty and glamorous neighborhoods alike, the credit crisis and the turmoil on Wall Street are bringing New York’s real estate boom to an end.

Last Friday, HSBC decided not to move its American headquarters to 7 World Trade Center, center, after bids for its existing home on Fifth Avenue came in 30 percent lower than it wanted.

Developers are complaining that lenders are now refusing to finance projects that were all but certain months or even weeks ago. Landlords bewail their inability to refinance skyscrapers with blue-chip tenants. And corporations are afraid to relocate within Manhattan for fear of making the wrong move if rents fall or a flagging economy forces layoffs.

“Lenders are now taking a very hard look at each particular project to assess its viability in the context of a softening of demand,” said Scott A. Singer, executive vice president of Singer & Bassuk, a real estate finance and brokerage firm. “There’s no question that there’ll be a significant slowdown in new construction starts, immediately.”

Examples of aborted deals and troubled developments abound. Last Friday, HSBC, the big London-based bank, quietly tore up an agreement to move its American headquarters to 7 World Trade Center after bids for its existing home at 452 Fifth Avenue, between 39th and 40th Streets, came in 30 percent lower than the $600 million it wanted for the property.

A 40-story office tower under construction by SJP Properties at 42nd Street and Eighth Avenue for the past 18 months still does not have a tenant.

“Everything’s frozen in place,” said Steven Spinola, president of the Real Estate Board of New York, the industry’s lobbying association, shortly after the stock market closed on Monday.

Barry M. Gosin, chief executive of Newmark Knight Frank, a national real estate firm based in New York, said: “Today, the entire financial system needs a lubricant. It’s kind of like driving your car after running out of oil and the engine seizes up. If there’s no liquidity and no financing, everything seizes up.”

It is hard to say exactly what the long-term impact will be, but real estate experts, economists and city and state officials say it is likely there will be far fewer new construction projects in the future, as well as tens of thousands of layoffs on Wall Street, fewer construction jobs and a huge loss of tax revenue for both the state and the city.

Few trends have defined the city more than the development boom, from the omnipresent tower cranes to the explosion of high-priced condominiums in neighborhoods outside Manhattan, from Bedford-Stuyvesant and Fort Greene to Williamsburg and Long Island City. Some developers who are currently erecting condominiums are trying to convert to rentals, while others are looking to sell the projects.

After imposing double-digit rent increases in recent years, landlords say rents are falling somewhat, which could hurt highly leveraged projects, but also slow gentrification in what real estate brokers like to call “emerging neighborhoods” like Harlem, the Lower East Side and Fort Greene.

At the same time, some of Mayor Michael R. Bloomberg’s most ambitious large-scale projects – the West Side railyards, Pennsylvania Station, ground zero, Coney Island and Willets Point – are going to take longer than expected to start and to complete, real estate experts say.

“Most transactions in commercial real estate are on hold,” said Mary Ann Tighe, regional chief executive for CB Richard Ellis, the real estate brokerage firm, “because nobody can be sure what the economy will look like, not only in the near term, but in the long term.”

Although the real estate market in New York is in better shape than in most other major cities, a recent report by Newmark Knight Frank shows that there are “clear signs of weakness,” with the overall vacancy rate at 9 percent, up from 8.2 percent a year ago. Rents are also falling when landlord concessions are taken into account.

The real estate boom has been fueled by a robust economy, a steady demand for housing and an abundance of foreign and domestic investors willing to spend tens of billions of dollars on New York real estate. It helped that lenders were only too happy to finance as much as 90 percent of the cost on the assumption that the mortgages could be resold to investors as securities.

But that ended with the subprime mortgage crisis, which has since spilled over to all the credit markets, which have come to a standstill. As a result, real estate executives estimate that the value of commercial buildings has fallen by at least 20 percent, though the decline is hard to gauge when there is little mortgage money available to buy the buildings and therefore few sales.

Long after the crisis began in 2007, many investors and real estate executives expected a “correction” to the rapid escalation in property values. But after Lehman Brothers, the venerable firm that had provided billions of dollars of loans for New York real estate deals, collapsed two weeks ago, it was clear that something more profound was afoot.

And there was an immediate reaction in the real estate world: Tishman Speyer Properties, which controls Rockefeller Center, the Chrysler Building and scores of other properties, abruptly pulled out of a deal to buy the former Mobil Building, a 1.6 million-square-foot tower on 42nd Street, near Grand Central Terminal, for $400 million, two executives involved in the transaction said.

Commercial properties are not the only ones facing problems. On Friday, Standard & Poor’s dropped its rating on the bonds used in Tishman’s $5.4 billion purchase of the Stuyvesant Town and Peter Cooper Village apartment complexes in 2006, the biggest real estate deal in modern history. Standard & Poor’s said it cut the rating, in part, because of an estimated 10 percent decline in the properties’ value and the rapid depletion of reserve funds.

The rating reduction shows the growing nervousness of lenders and investors about such deals, which have often involved aggressive – critics say unrealistic – projections of future income.

“Any continued impediment to the credit markets is awful for the national economy, but it’s more awful for New York,” said Richard Lefrak, patriarch of a fourth-generation real estate family that owns office buildings and apartment houses in New York and New Jersey.

“This is the company town for money,” he said. “If there’s no liquidity in the system, it exacerbates the problems. It’s going to have a serious effect on the local economy and real estate values.”