Despite new glimmers of hope for landlords battered by months of bad news, tenants with good credit remain firmly in control of the Manhattan office leasing market, brokers said.
Steadier leasing volume, declines in availability rates and even increases in asking rents for some segments of the market might appear to strengthen the building owner’s hand, but brokers said there is still too much product, and too few tenants.
“It has improved [for the owners] in the sense that there may be more activity,” said David Lebenstein, senior managing director for Colliers ABR. “[Landlords] may be lucky in some cases. They may have more than one option. But we see plenty of situations where the tenant is the only game in town.”
Manhattan office leasing statistics are providing no clear direction to market participants. Leasing activity was down in August to 1.8 million square feet from the previous month, a drop of 19 percent from the prior month, but the month’s leasing volume was up 41 percent from the prior-year month of August 2008, the most recent figures from commercial real estate firm CB Richard Ellis showed.
Average asking rents, meanwhile, were down by $1.15 per square foot to $51.28 per square foot in August compared to July, and off 29 percent from their peak of $71.92 in July 2008.
The availability rate — which calculates the percentage of space that is or will be available for lease within the next 12 months — declined by 0.1 points to 14 percent, CBRE data showed.
Yet on the ground, landlords are showing flexibility. Recently some have considered dividing up large floor plates, which during the boom were aggregated to attract large finance and legal firms and maximize income.
Jeffrey Peck, senior managing director at tenant representative firm Studley, said he was negotiating with a Park Avenue landlord who is offering to lease just 12,000 square feet of a 27,000-square-foot floor plate.
“They will give us the prime portion of the floor and they have no tenant for the other half,” Peck said. “The building at one point was unwilling to divide any of their full floors.”
The hints of optimism have emboldened some landlords, perhaps too much given current market conditions.
Paul Wolf, co-president of Denham Wolf Real Estate Services, which represents nonprofit companies, said early last month that a landlord he was negotiating with in Midtown South turned down an almost-finalized deal, only to get burned.
“The landlord got cold feet and basically said it was too sweet a deal. [He said,] ‘I am not going to do it, I think the market will improve,’ and bailed on it,” Wolf said.
“We basically called his bluff, and then he called two weeks later and said, ‘I am ready to do the deal.’”
By then, the tenant had turned his interest to other properties.
“[The landlord] should have stuck with the bird in the hand,” Wolf said.
Midtown
While July’s leasing activity wavelet retreated sharply in August, the data suggest some positive signs, similar to the overall Manhattan picture.
Leasing volume in Midtown fell 24 percent in August, to 1.2 million square feet from the month earlier, and average asking rents fell 2.4 percent in the same period, to $57.94 per square foot, CBRE data showed.
Still, the taking rent index, which tracks the final rent as a percent of the asking rent, has been rising in recent months, which could be interpreted as a sign of strength for landlords. In August, the index climbed to 81.2 percent, the first time it has been above 80 percent since January, according to CBRE.
But Peck said that simply indicated that landlords are pricing space more realistically.
“If the deal was going to be at $50 per foot, instead of asking for $70 and getting the deal done at $50, they are now asking for $57 and getting the deal done at $50,” he said.
Still, as a sign of improvement for owners, the availability rate dropped 0.4 points in August to 14.8 percent, CBRE statistics indicated.
In Class A buildings, average asking rents actually rose a notch, to $0.52 in August to $68.76, according to real estate services firm Colliers ABR, marking just the second time this year they’ve gone up. The indicators for Class A buildings are closely monitored because much of Midtown’s vacant space is in those towers.
“This clearly has been a Midtown Class A recession,” said Kenneth McCarthy, a managing director at Cushman & Wakefield, cautioning that, “Although activity is up and it might continue, pricing continues to be under pressure.”
Midtown South
The Midtown South market exhibited some of the same mixed signals that were seen in its larger neighbor to the north, but to a more muted degree.
Just 180,000 square feet of space was leased in Midtown South in August, a decline of 23 percent from the month before, and average asking rents fell by $0.81 to $42.68, CBRE statistics showed. The average asking rent is now 20 percent off its high in August 2008, when it reached a rate of $53.37.
But at the same time, the availability rate edged down slightly to 14.3 percent in August from 14.4 percent, and absorption turned positive to 40,000 square feet, compared to a net loss of 250,000 square feet in July.
Bargain hunters are starting to move their gaze from Downtown to Midtown South, especially in buildings near Eighth and Ninth avenues, Wolf said.
“Now it is the pricing in the Garment District” that is attracting tenants, he noted.
However, just 15,000 square feet of leases were signed in the Chelsea submarket that includes the Garment District, a quarter of its monthly average, according to the CBRE figures.
Downtown
Downtown was the only market to show an increase in leasing activity in August over July, with 430,000 square feet signed, an increase of 30,000 square feet from July and the strongest month since June 2008, CBRE data indicated.
In fact, the largest lease signed in August in Manhattan was Downtown. The Gap signed a 265,000-square-foot office lease at 40 Worth Street, between West Broadway and Church Street in Tribeca.
But as in the other markets, the statistics were uneven. The availability rate rose by 0.4 points to 11.4 percent in August, and average asking rents fell by nearly a dollar to $40.20.
The availability rate would have been higher, but Goldman Sachs pulled a 200,000-square-foot block of space at One Liberty Plaza off the market, Colliers ABR said in a report.
