Strong leasing velocity is beginning to remove the fear that the Manhattan leasing market will go into freefall, as landlords continue to provide aggressive incentives — such as rent reduction clauses and offers to buy out expiring leases — to get contracts signed, brokers said.
Incentives that were completely unheard of a year ago, or at least difficult to get put in a deal, are now being offered regularly, said Robert Stella, executive vice president at real estate advisory firm Cresa Partners.
“If you want favorable terms for expanding, or contracting, or lease cancellations, those are all on the table now,” he said.
Stella said one major landlord, whom he declined to identify by name, offered a tenant an option to adjust the rent down by at least 10 percent for up to a year if business gets rocky down the line.
“Frankly, I have never seen it before, a rent adjustment based on certain forms of business not working out. Call it a ‘get out of jail free’ card,” Stella said.
He noted that the reduction was the most generous incentive he’s seen in the last few months. Such incentives have played a part in the sharp rise in leasing activity, brokers said. According to the most recent report by commercial service firm CB Richard Ellis, there were 2.2 million square feet leased in Manhattan in July, up from 1.4 million in June.
The strong activity brought down the availability rate — which calculates the percentage of space that is or will be available for lease within the next 12 months — in Manhattan from 14.2 percent in June to 14.1 percent in July, CBRE figures showed.
Howard Dolch, executive vice president at commercial real estate firm Lansco, said there were similarities between the recent surge in leasing and the federal auto incentive program.
“I think it’s like the Cash for Clunkers program. When a tenant sees that a certain amount of concessions are on the table, and sees that it is extremely beneficial to act,” it moves to sign a lease, he said.
But despite those positive indicators for landlords, pricing continued to fall, with the average asking rent in Manhattan declining another 1.7 percent to $52.43 per square foot in July from $53.35 per square foot a month earlier, the CBRE data revealed.
Asking rents are down 27 percent from their high in July 2008 of $71.92.
The incentives highlight that landlords remain in the weaker position.
“The tenant still has the hammer,” said Peter Sabesan, principal at the tenant representative commercial firm Hunter Realty Organization, who brokered a 15,683-square-foot sublease at 7 World Trade Center last month.
The rent-adjustment provision described by Stella underscores the reversal of fortunes compared to a year ago, said Scott Bloom, president of commercial sales and leasing brokerage Bloom Real Estate Group.
“It is the reverse of the normal fair-market-value provision,” which allows the landlord to renegotiate rents higher in the out-years of a lease if overall rental rates have increased, Bloom said.
He said he had not personally seen the same type of rent reduction provision.
Glenn Markman, executive vice president with commercial brokerage Cushman & Wakefield, noted that another tenant-friendly clause making its way into contracts is the lease buyout. Last month, he was negotiating a Midtown lease for new space on behalf of a tenant with strong credit — and with months left on an existing lease. In order to woo the tenant to take about 40,000 square feet in a building with asking rents in the $50s, the landlord offered to buy out the remaining time on the tenant’s old lease, he said. Tenants with plenty of time remaining on their leases are searching for opportunistic pricing, said Nicholas Haines, executive vice president with Bromley Companies, a landlord that owns and manages several hundred thousand square feet of office space in Manhattan, as well as properties in five other states.
“Many of the people contacting us have existing space with some lease term remaining, but are looking to take advantage of the [down] market,” he said.
Steven Durels, executive vice president and director of leasing at the city’s largest office landlord, SL Green Realty, said the company signed several leases with tenants that had as much as four years left on their leases.
“I’m starting to see guys with 2012 and 2013 lease expirations knocking on our door saying, ‘Hey, I would like to extend my lease for five years,’” he said. The company signed “one or two” such deals with expirations in 2013, he said.
Yet he was reluctant to call it a trend.
Durels did add that tenants were seeking longer leases of 10 to 15 years and “migrating away from the 12- to 18-month extensions that were being done at the beginning of the year.”
Midtown
Midtown showed the most strength of the three markets within Manhattan. Leasing activity was up in July, pushing the availability rate down to 15.2 percent, a drop from 15.4 percent the month earlier, CBRE data said.
Stella cautioned that the leasing spike was due in part to transactions that were stalled after the credit collapse.
“A lot of those [deals] that closed now should have, if there wasn’t a financial crisis that scared everybody to death … closed in the fourth [quarter of 2008] or the first quarter [of 2009],” he said.
But pricing continued to fall, spurred by landlords dropping asking rents on 178 blocks of space totaling 2 million square feet by an average of 16 percent, CBRE reported.
The average asking rent fell by $1.05 per square foot in July to $59.40, off 31 percent from one year earlier, when it was $86.38 per square foot.
The Sixth Avenue-Rockefeller Center submarket had the greatest activity in July, with a total of 540,000 square feet leased, doubling the monthly average of 270,000 square feet.
Midtown South
Leasing activity remained lackluster in Midtown South in July, with 240,000 square feet leased, nearly a quarter below the area’s five-year average, CBRE reported. Weak leasing and the addition of space by landlords to the market made the district the only one of the three in Manhattan to see negative absorption for the month, totaling 250,000 square feet.
The average asking rent fell by $1.30 per square foot to $43.49 per square foot, and the availability rate rose by 0.3 points to 14.4 percent, its highest level since June 1995, CBRE figures showed.
The Flatiron District had the highest availability rate of any submarket in Manhattan, edging up 0.1 points to 19.1 percent, the data showed.
Downtown
Tenants leased 400,000 square feet of space Downtown in July, the most in the district since June 2008, but asking rents continued to decline as they did throughout Manhattan.
Average asking rents fell by $0.72 per square foot to $41.19 per square foot in July from the month earlier, while the availability rate dropped by 0.1 points to 11 percent, CBRE figures showed. The average asking rent in July was off 18 percent from one year earlier, when it was $50.18 per square foot.
Despite the strong velocity, Downtown was the only district where the taking rent index, which measures the actual base rent as a percent of the asking rent, fell in July, by 0.5 points to 73 percent. In Midtown South the figure was just under 87 percent, and in Midtown it was 79.8 percent.
