The Real Deal New York

Lehman bankruptcy brings uncertainty to office market

September 15, 2008 09:44PM
By Adam Pincus

The fallout from the bankruptcy of Lehman Brothers, a firm that occupies 2.5 million square feet of office space in Manhattan, will almost certainly drive up the vacancy rate and could also harm some high-profile projects, real estate analysts said.

John Cicero, president and CEO of commercial real estate appraisal firm Miller Cicero, said he expects Lehman’s bankruptcy to drive up vacancies, but it was hard to know how soon.

“How quickly that office space is put back on the market is anybody’s guess,” he said.

Richard Anderson, senior REIT analyst with BMO Capital Markets noted that office conditions were not as difficult as in 1990, when vacancies exceeded 16 percent. In August, Colliers ABR reported that the office vacancy rate in Manhattan was 8.7 percent.

“The Manhattan office market is now in uncharted territory with events continuing to unfold,” CB Richard Ellis said in a statement. “It is premature to assess how, over time, these announcements will impact Manhattan market fundamentals.”

Lehman Brothers Holdings filed for Chapter 11 today as Bank of America announced that it will pay around $50 billion to acquire Merrill Lynch. It remained unclear how much space would be vacated as a result of either action.

“We will definitely see a decline in occupancy,” said Peter Slatin, editorial director of market analyst Real Capital Analytics.

The collapse of Lehman and the ensuing return of large amounts of office space to the market could stall large-scale developments, as well.

Lehman owns or leases 2.5 million square feet in eight buildings in the city, where it employs 10,000 to 12,000 workers. The firm owns its world headquarters, the 1.1-million-square-foot building at 745 Seventh Avenue at 49th Street, and leases space in the other seven.

But the return of the Lehman space could impact projects underway and in development in Manhattan that are not directly connected with the firm. SJP Properties is building a 1.1-million-square-foot speculative office tower at 11 Times Square and Larry Silverstein and the Port Authority are developing office buildings in Lower Manhattan. The additional space would be a jolt, too, to projects under consideration for development, such as the Port Authority bus depot, by increasing competition in a weak market.

Lon Rubackin, managing partner of commercial real estate firm GFI Retail Group, said he expects a more positive outlook next year.

“I feel once we bottom out — and I feel we are closer to the bottom — once we are through the first half of next year we are going to have a nice upswing,” he said.

Vornado Realty Trust and partner Ruben Company are in negotiations with the Port Authority of New York and New Jersey to build a 40-story, 1.3-million-square-foot office building above the bus depot at Eight Avenue and 42nd Street.

“You can write off the Port Authority plans to build an office tower over the bus terminal,” Slatin said. “And that will be the second time that it was scuttled.”

A spokeswoman for Vornado had no comment and a Port Authority spokesman said the project remained in negotiations.

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