Vacancy rates have surged in all three of Manhattan’s office leasing markets, after a number of chunks of space came online in the last quarter, said executives at Avison Young’s 2013 Crystal Ball market overview held this morning at the Cornell Club in Midtown. And the hesitation in commercial leasing in Manhattan is likely to continue until at least this summer, they said.
The Canadian brokerage made its entrée into the U.S. just last year, and today’s discussion was the first such overview the firm has convened. Speakers included Arthur Mirante, tri-state president of Avison, as well as a number of Avison principals and economist Sam Chandan, a professor at the University of Pennsylvania.
The 2012 leasing market was hit hard by political “uncertainty,” said James Delmonte, the brokerage’s vice president of research in the tri-state region. And the few leases that were inked in 2012 were mostly renewals and deals under 10,000 square feet, added Michael Leff, a principal with Avison.
The Downtown market fared worst, with vacancy skyrocketing in the fourth quarter, to 16 percent quarter-over-quarter from 11.8 percent, Avison’s figures show. That reflects nearly 2.2 million square feet of inventory added that quarter at 4 World Trade Center and the World Financial Center. However, Delmonte noted, that addition was anticipated, so “the market sentiment was not affected.”
The average asking rent Downtown was about $48 per square foot in the fourth quarter, Avison’s data show.
In Midtown South, things were significantly better, with vacancy at 8.4 percent, up from 7.9 percent in the third quarter of 2012. That increase reflects the addition of 130,000 square feet at 330 Hudson Street and other chunks of space at 249 and 245 West 17th Street — all of which hit the market this quarter.
Still, Midtown South is perhaps the single sunny spot in an otherwise bleak office market. The average asking rent in Midtown South was about $51, but Delmonte said asking rents in many transactions inched up to the $70s per square foot— close to the average asking rent for Midtown, which is traditionally Manhattan’s priciest market.
Tenants pinched by the increasingly high prices in the Midtown South market are not going to get crowded out though, Leff said. Instead, tenants are increasingly moving west. And while the technology sector has gotten most of the credit for the relatively healthy leasing climate in Midtown South, the tenant base is diversified, in turn making the area more appealing, the report noted.
The Midtown market also saw new vacancies, as large blocks of space became available for lease at 1221 and 1251 Sixth Avenue, 919 Third Avenue and 101 Park Avenue. But activity and pricing stayed relatively flat, with vacancy up to 11.9 from 11.1 percent quarter-over-quarter, and pricing steady at about $71 per square foot, according to Avison’s research.
However, while activity is admittedly down year-over-year, leasing numbers in 2011 were relatively bright in the context of the last decade, as brokers at Cushman & Wakefield’s fourth quarter leasing breakfast noted on Tuesday. A total of 6.1 million square feet was leased in the fourth quarter of 2012, still putting it above the ten-year rolling average of 6 million, according to Cushman’s figures.
Conversely, the investment sales market in 2012 was lively, even frothy, although brokers and financial executives at Avison noted that with the low cost of capital in 2012, capitalization rates also remain low, sometimes as low as three percent. The transaction volume for investment in sales in the borough through November 2012 was $32 billion, in line to beat 2006′s deal volume, research from Avison shows.
With returns even from trophy properties potentially very low, large institutional investors are now looking for new places to park cash, said Jon Epstein, a principal with Avison. MetLife, the insurance titan, is “talking about getting into development,” meaning buying development sites instead of already completed buildings, Epstein said. While the company used to demand eight percent returns on investment in real estate assets, they are now satisfied with “7 and change,” he said.
With cheap money accessible for credible borrowers, investors are in search of riskier assets, even looking to secondary and tertiary markets, like suburban office buildings in places like Austin, Texas and Charlotte, N.C., said David Eyzenberg, another principal with the firm. He said that the private equity giant Blackstone Group is in the midst of “a massive play in suburban office” assets in its search for richer returns.
Canadian real estate investment trusts are also continuing their New York City buying spree, Eyzenberg told the crowd. Canadian REITs will often avoid “taxation issues” by nabbing a 49 percent interest in an American REIT, Eyzenberg said.
But, real estate economist Sam Chandan warned brokers not to begin treating the low interest rates — which are in part fueling the bustling investment sales market — as “the new normal.”
“We think of New York City assets as a sort of reserve currency,” he said. But those rates should be construed as one convenient component of an “experimental and interventionist monetary policy,” he warned.