By James Kelly
While it’s fairly well known that the market has been showing a decline in taking rents, the bottom line after price negotiations and accounting for concessions, the summer months may have brought the first of a surge in owners marking down the advertised price on spaces.
The number of landlords reducing their published asking rents is slowly creeping up in Manhattan, though as a whole the market here is still seeing an increase. Manhattan’s average asking rent increased 57 cents to $71.92 per square foot in July, from $71.35 per square foot in June. It increased 12.5 percent from $63.93 per square foot one year earlier.
At this point, about 10 percent of published asking rents are being reduced before accounting for negotiations, according to Howard Dolch, executive vice president, cofounder and principal at Lansco.
While this may not seem like a high number, it represents a noticeable increase from previous months, according to Dolch, and “it’s the first time we’re seeing [asking rent reductions] in the current market cycle,” he said.
The highest concentration of asking rent markdowns has been in Class A and Class B+ space in Midtown, according to Dolch. They are coming down mostly at properties that saw the most “overinflated rental prices” from a year ago, he said. As a result, he believes landlords will be able to survive adjustment there without too much harm.
“For the most part it’s not really such a hardship for them,” Dolch said. “If they were getting $75 per square foot a year ago, and have now raised their rents to around $100 per square foot, for example, it’s not going to kill them to go back down to $85 or $90.”
Leasing activity showed a slowdown typical of summer months, falling to 1.65 million square feet in July, 28 percent lower than the 2.28 million square feet leased in June. Manhattan’s leasing activity was 1.53 million square feet in July 2007.
There is hope that the correction in rents will cause tenants who were waiting for good deals to start sitting down and signing leases, especially if the trend continues.
“There is a lot of demand that is waiting on the sidelines because they want to wait for further price reductions,” said Richard Warshauer, senior managing director at GVA Williams.
However, Warshauer doesn’t believe that the expected price reductions will be drastic enough to make it worth the wait for most tenants.
“It’s very tough to beat the market, to lease low and sublease high, and [a company] has to do what’s best for their business at the time,” Warshauer said. “I think tenants will begin to realize that. It’s not like they’re real estate professionals; they’re in business to produce ads, or provide health care, or manufacture widgets,” he said.
Elliot Warren, director of leasing at the Kaufman Organization, said he noticed that tenants are more hesistant than usual to sign lease terms of 10 years or longer.
The market had a slight contraction in overall vacancy — the rate dropped 20 basis points to 5.8 percent in July, from the month before. The vacancy rate was up 140 basis points from 4.4 percent one year earlier.
The volume of sublet space coming on to the market, however, is accelerating each month, according to Dolch. The biggest influx of sublet space is in the Plaza District, where financial giants like Lehman Brothers and Citigroup have given up space, Warshauer said.
Washauer believes that as more space comes on the market through the remainder of the year, prospective tenants may not see huge price reductions, but they will have more alternative spaces to choose between.
“If there are 15 spaces that are satisfactory for a prospective tenant right now, there may be 20 that are available six months from now,” he explained.
Warren said the increase in options is already very noticeable. “There are definitely more opportunities spacewise to accommodate tenants than a few months ago and they have a lot more options now than last summer,” he said.
Warshauer said he doesn’t see the market turning towards the landlord’s advantage again for at least another 18 months. Warren was less eager to try and guess when the market will hit bottom.
“There are so many variables: who the next president will be, how the stock market is doing, what’s the value of the dollar,” Warren said. “Ultimately it’s supply and demand that’s going to determine the bottom point.”
Midtown
The overall vacancy rate in Midtown was down 10 basis points to 5.2 percent in July, from 5.3 percent in June. It was up 130 basis points from 3.9 percent in July 2007.
The average asking rent there fell 19 cents to $86.38 per square foot in July, from the month before. It was up $6.74 compared to last year. There was 1.1 million square feet of leasing activity there in July, compared to 830,000 square feet leased in June, and 1.01 million square feet leased in July 2007.
Midtown South
The vacancy rate in Midtown South fell to 6.0 percent in July, off 70 basis points from 6.7 percent in June. It was up 190 basis points from 4.1 percent the year prior.
The average asking rent there increased to $53.34 per square foot, from $53.05 per square foot the previous month. The average asking rent was $7.62 higher than it was in July 2007 when it was $45.72.
There was 220,000 square feet of office space leased in Midtown South in July, down 42 percent from 380,000 square feet in June. It was also down 12 percent from July 2007′s leasing activity of 250,000 square feet.
Downtown
Downtown saw an increase in average asking rent in July, up 65 cents to $50.18 per square foot. It was up $4.21 from $45.97 in July 2007. The vacancy rate was up slightly, to 7.2 percent, from 7.1 percent the previous month. It was up 130 basis points from 5.9 percent the prior year.
There was 320,000 square feet of leasing activity Downtown in July, off 74 percent from 1.02 million square feet in June. It was not as slow, however, as it was in July 2007, when leasing activity was 270,000 square feet.
