The Real Deal New York

Landlords keep tabs on job losses

Spiking commercial vacancy rate closely follows rising unemployment in New York City

March 31, 2009
By Catherine Curan

Go to chart: Private sector employment vs. Manhattan vacancy rate

Like most New York landlords, George Constantin is paying very close attention these days to unemployment statistics.

Constantin recently negotiated renewals on 46,500 square feet of commercial space his company, Heritage Realty Services, controls in White Plains, so an up-to-the-minute awareness of the worsening local unemployment picture is prompting him to offer sweeter deals than normal.

The close correlation between rising unemployment and spiking commercial vacancy rates is particularly acute in the New York metro area, where the market is heavily supported by office tenants.

“There is a direct relationship with job losses: [Downsizing] companies don’t take space,” said Constantin, adding that the economic crisis means “we try to front-load with better terms for tenants, more free rent and, depending on the credit-worthiness of the tenant, we try to lessen their cash outlays” (see related story on page 20).

Constantin, who also owns commercial properties in Manhattan, is president of Heritage, a boutique real estate ownership and development firm with $400 million in assets. He said he has been offering breaks on rent for the first three years of a lease; in recent deals at Gannett Office Park in White Plains, for example, he offered tenants rents one-third lower than they would have been in a good economy.

With landlords like Constantin reacting to job trends, tenant brokers report finding substantial new leverage on rent and terms in the last couple of months. In some cases, taking rents in Manhattan are coming in at 40 percent below the asking price.

On the investment sales side, rising unemployment is a key factor in determining net absorption rates, a starting point for many valuation calculations. Most notable about the increase in unemployment’s present effect on investment sales, though, is that it’s part of an overall confluence of negative economic fundamentals and frozen credit markets, said Woody Heller, executive managing director and group head of the capital transactions group at Studley.

“In terms of value when you are looking at the capital markets and underlying fundamentals, employment is the key factor, but right now we are facing a double curse … of negatives that reinforce one another, and that’s a bad thing,” said Heller.

Two big questions uniting all these players are: When will the economy hit bottom and when will it begin to recover? Here, too, employment statistics play a critical role in forecasting. Constantin said he uses this data to gauge and estimate that point, which he said usually occurred in prior recessions when 80 percent of expected job losses had occurred.

Anyone tracking this data has a growing array of stark unemployment statistics to monitor. New York City’s unemployment rate hit 7 percent in January, and a recent UBS forecast said it could climb to an eye-popping 10.5 percent, an unwelcome flashback to levels seen during the city’s desperate times in the 1970s under Mayor Abraham Beame. The reeling financial sector is set to shed 77,000 workers through 2011, according to a March report from the Independent Budget Office. Those losses will lead to further layoffs, as one to three service positions is tied to each securities job.

Marisa Manley, president of Commercial Tenant Real Estate Representation, a consulting and brokerage firm that represents commercial tenants, said that as unemployment has risen so dramatically over the last few months, she has begun seeing landlords make significant concessions. Such moves are coming even at the third and fourth counteroffer, she said, and range from reducing base rent to 30 to 40 percent lower than the asking price to generous free-rent allowances.

“In November, when we were negotiating with the owners of a Class A building, we came in with an aggressive offer, and one of the owners said he doesn’t have to respond to terms like this, he’ll just mothball the space and sit with it. We’re not hearing that anymore,” said Manley.

An already high 11.6 percent vacancy rate is boosting Manley’s negotiating power, she said, and that rate is expected to keep rising. Experts say Manhattan’s overall vacancy rate could rise to 15 to 16 percent.

Forecasters expect such high numbers because this downturn is unusual, with challenges from both economic fundamentals and capital markets, and job losses concentrated in financial services. This sets the crisis apart from the 2000-01 recession, which was spurred by the dot-com bubble and the terrorist attacks of Sept. 11, and other slumps.

“Financial services drives this market, unfortunately, so I think it’s going to take us longer to come out of it,” said Robert Sammons, managing director of research at Colliers ABR.

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