If you had to sum up the current Manhattan office leasing market in one word, it wouldn’t be hard to pick it: flat.
While office leasing volume improved to its highest level since the downturn this past summer and spring, it’s been stabilized for several months at a decent but slightly lower level. It rose by only 60,000 square feet to 1.6 million square feet in September, according to the latest data from commercial brokerage CB Richard Ellis.
Meanwhile, asking rents Manhattan-wide, which are down roughly 25 percent compared to the peak in 2008, have also been stuck in neutral for several months, in the high $40s. They declined Downtown in September compared to the month before, and have bumped up a little in Midtown and Midtown South during that same time, according to CBRE data.
Still, the scales seem to be tipping slightly in landlords’ favor. Brokers say that while building owners are still offering generous incentives to tenants — including picking up the tab for build-outs — that’s starting to dial down.
Nonetheless, the tenants who are looking for space now are lucky compared to those who signed leases two years ago, before the market nosedived.
The nation’s oldest and largest legal organization that advocates for gays and lesbians, the Lambda Legal Defense and Education Fund, is one of the lucky ones on the hunt now. The organization is facing a lease expiration in a year, and is looking to consolidate to one floor, either in their current Downtown building or elsewhere.
In evaluating the current market, Sheldon Cohen, senior managing director for CBRE, took a macro view, noting that leasing volume growth may have leveled in real time, but that compared to a year ago, it’s dramatically up.
Still, he added, pricing remained weak.
The third quarter was “characterized by incremental growth and stability in the leasing activity and in the absorption that is occurring,” he said last month during a market briefing at CBRE’s Midtown offices. However, he added: “Asking rents are flat.”
Indeed, asking rents for Manhattan in September, the most recent figures available, were almost unchanged compared to the prior month, rising just a penny to $47.74 per square foot, while the availability rate declined by .1 point to 13.3 percent.
For the second month in a row, Midtown has seen asking rents improve, albeit only by 34 cents a square foot to $55.27 per foot. Meanwhile, the availability rate, which measures space that is available now or within 12 months, declined by .2 points to 13 percent, CBRE figures showed.
That has given landlords a mini confidence boost. Indeed, market observers expect that tenants will soon start seeing fewer of the hefty landlord contributions that greased many deals over the past two years.
Last month, David Hoffman, executive managing director at Cassidy Turley, attracted an accounting firm to the entire 10th floor of 477 Madison Avenue by offering to build out the space at no cost to the tenant.
The firm, Hertz, Herson & Company, signed a deal for 17,548 square feet in the 318,000-square-foot office building, which is at 51st Street in Midtown. While Hoffman wouldn’t disclose the taking rent, the asking rent for the sixth floor in the building is $46 per square foot, according to figures from the CoStar Group. The accounting firm is currently located at 2 Park Avenue.
But despite the contribution from landlord J.A.B Madison Holdings, with its next tenant, it may not be so generous. That’s partly because since the spring, the landlord has leased up 61,000 square feet in the building, Hoffman said.
“Even though we have some vacant space in the building, I think we are probably going to pull the reins in a little bit. I think we would be less inclined to build to suit for somebody else who came along for a full floor,” he said.
Hoffman explained that leasing a full floor for a long time — like the 15-year Hertz deal — locks the landlord into today’s lower rents, while most experts anticipate rents will rise over the next few years. So in a move that seems to be illustrative of the rest of the market, the landlord, who is in negotiations with a tenant for the entire sixth floor, is considering breaking up that space.
Hoffman said that by breaking up a floor and leasing to several smaller tenants for five-year terms, for example, the owner could return the space to the market in 2016, and presumably get better rents.
With leasing volume in Midtown South at its highest level in six years, some landlords have become emboldened, and are listing new space at relatively high prices.
Alex DeFortuna, president of Hudson Realty Enterprises and the leasing agent for the 130,000-square-foot Class B Spero building at 19 West 21st Street, said last month he listed a small space on the 10th floor, with an asking rent of $30 per square foot.
“It is put out at a price that is slightly over the market, I would say. But we don’t have any doubt that we will get what we want,” he said.
The building, which is near Madison Square Park, has a very low vacancy rate of about 3 percent. Plus, the space is occupied by a video production tenant that is growing and needs to move, but which has a lease that runs through next year, he said.
DeFortuna noted that rents had fallen dramatically in the district over the past two years, which was helping to drive activity. CBRE figures showed the average asking rent for Class A and B properties in Midtown South was $42.93 per square foot in September, down 20 percent from the peak of $53.37 in August 2008.
Through the end of September in 2010, tenants had leased 3.2 million square feet of space in relocations or expansions in the district — the most since 2004. In 2004, 3.3 million feet had been leased by the end of September, figures from CBRE showed.
Despite the increased activity, James Buslik, a principal at the landlord and brokerage firm Adams & Company who specializes in Midtown South, said tenants were still wary about moving.
Many tenants that do move to his buildings, he said, do so because they have outgrown their previous space. “They have to have a need. Some are out shopping because they want to go to their landlord for a better deal. But those who take space in our buildings are those in the tech sector that are satisfying a need [for a larger space],” Buslik said.
Kevin Cathcart, the executive director of Lambda Legal Defense and Education Fund, takes no credit for timing the market. But he may end up benefiting from it if he locks in a new lease soon.
Average asking rents Downtown peaked in September 2008 at $50.35 per square foot, and have now fallen 24 percent to $38.20 per foot, CBRE figures show. And unlike the other two Manhattan districts, asking rents have continued to drift lower — falling in September 10 cents a foot from the prior month.
Cathcart’s group occupies about 21,000 square feet at 120 Wall Street overlooking the East River, information from CoStar shows. He noted some nonprofits in the building had to sign new leases in early 2008 before the market turned downward. “I am happy I did not sign a lease in the beginning of 2008. But I can’t claim any prescience or crystal ball,” he said.
With its lease expiring in about a year, Cathcart said Lambda is looking for about the same amount of space.
He would not comment on whether the group was going to renew or move, but said it had been on tours of other spaces beginning in the summer with its representative agency, Cassidy Turley.
His group moved to the building in the mid-1990s, when nonprofit tenants were receiving tax incentives to keep them in New York City. Lambda grew to occupy two floors, and Cathcart wants to get it back onto one.
His goal will not be as difficult to obtain Downtown, which since June has had the highest availability rate of the three Manhattan markets. It now stands at 14.3 percent, compared with Midtown South at 13.1 percent and Midtown at 13 percent.