The Real Deal New York

A chill in the air for office leasing

November 04, 2007
By Lauren Elkies

There’s no doubt about it — the office market has started to show signs of a slowdown.

“There’s obviously been a chill as a result of what’s happening in the credit market,” said Dean Shapiro, an executive managing director and head of the New York City operation at CB Richard Ellis.

Manhattan had seemed impervious to the credit troubles plaguing the rest of the country, but recent data suggests otherwise.

Leasing activity has dropped significantly in Manhattan, according to the most recent CB Richard Ellis data available at press time.

The amount of property leased took a nosedive in the borough between August and September, to 1.13 million square feet from 2.29 million square feet. Year over year, September leasing activity plummeted close to 70 percent from 3.49 million feet.

Questions about the future health of the leasing market as a result of uncertainty on Wall Street still linger. More conservative leasing decisions by the city’s financial institutions, typically the largest takers of space, likely contributed to the lull in the pace of leasing.

Not everyone attributes the decline in leasing activity to the credit crunch.

Leasing velocity, “which has been running 10 to 15 percent below historical averages since the fourth quarter of last year, has slowed as a result of transactions that were signed in 2005 and 2006 that included ample space for growth,” explained Steven Coutts, Studley’s senior vice president of national research services.

In Cushman & Wakefield’s third-quarter report, Joseph Harbert, the company’s COO of the New York metro region said: “The slowdown in activity may be attributed primarily to a lack of supply and the historic highs to which rents have risen.”

The vacancy rate in the borough increased to 4.8 percent from 4.4 percent in August, but was still lower than in September 2006, when the rate was 5.6 percent, CBRE data indicates.

Brokers said that when the decision to take office space is need-based, businesses are proceeding with leases.

“If they have the need they’re out there, and we’re still seeing quite a bit of activity,” said Stuart Romanoff, an executive vice president at Cushman & Wakefield.

Despite a drop-off in leasing activity, landlords do not appear to have adjusted expectations for rents.

Asking rents dropped only 3 cents per square foot to $64.36 between August and September. The number was up compared to September 2006, when the rent was $50.02.

Perhaps because of the dearth of office space, some landlords still feel justified in being aggressive on rents.

New asking rents on lease renewals “are so out of whack,” said Leonard Boxer, chairman of Stroock & Stroock & Lavan’s real estate practice. He had one client who was paying $38 a square foot in rent in a well-known building when the landlord hit the tenant with a renewal rent of $71 a foot. His client was forced to move out.

It could just be too early to see rent decreases.

Asking rents “are the last thing to go down,” said William Montana, a managing director at Studley.

Some landlords, however, are responding to the lull in activity by offering concessions. Concessions for tenants taking a sizable lease have increased to three to four months from a more typical one to two months, Boxer said.

Echoing his comments from last month’s commercial market report, Montana said that because activity and demand have slowed, “the leasing agents are being more aggressive in pursuing tenants, and the building owners are reaching more to do deals.”

Midtown
The average asking rent in Midtown increased 61 cents a square foot — less than 1 percent — in September from the month before. But was up more than $20 — or 33 percent — from September 2006, CBRE data shows.

The average asking rent in September was $81.95 per square foot versus $81.34 a month earlier and $61.51 in September 2006.

Charles Kushner, chairman of Kushner Companies, said if 666 Fifth Avenue (which the company bought for a record $1.8 billion last year) was any indication, the market was faring well.

“The demand is very great, and supply is limited. So right now the market variables … in prime Midtown Manhattan are still very favorable to landlords,” Kushner said.

The amount of space leased in Midtown dropped 43 percent, or 540,000 square feet, between August and
September.

Leasing activity was at 720,000 square feet in September, from 1.26 million square feet in August. The amount of space leased saw a more dramatic drop from the previous September, when 1.47 million square feet was leased.

The vacancy rate rose slightly in September to 4.2
percent from 4.1 percent in August.

Midtown South
Space is “super tight” in Midtown South, Montana of Studley said. But leasing activity saw the sharpest monthly drop of the three submarkets at 62 percent, to 220,000 square feet from 580,000 square feet, CBRE data indicates.

Asking rents increased more in Midtown South than in Midtown (and rents actually decreased Downtown).

Midtown South asking rents rose $1.12 per square foot, or 2.4 percent, to $48.54 from $47.42, CBRE data shows. Rents in the submarket are up 28 percent over September 2006, when rents averaged $38.08.

The low Midtown South vacancy rate surged upward to 5.2 percent in September from 3.7 in August, but was the same as in September 2006.

Downtown
Downtown’s leasing activity plummeted 59 percent to 180,000 square feet in September, from 440,000 square feet the month before.

But there are deals on the horizon that could affect this month’s leasing activity.

As of late October, a few major leases in advanced negotiations were the Omnicom Group at 195 Broadway, American Lawyer Media at 120 Broadway and the New York City School Construction Authority at 26 Broadway, Montana said.

Unlike in Midtown and Midtown South, asking rents Downtown went the same way as its leasing activity — down, albeit less than 1 percent. September’s average asking rent decreased to $45.98 from $46.37 the previous month, but was up 16 percent from a year earlier, when rents averaged $39.52.

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