Whether encouraged by declining asking rents or spurred by pent-up demand, brokers said office tenants finished out the extremely difficult year of 2009 with a flurry of activity.
Yet few believed the market had found a solid footing, as landlords continued to cut asking rents to compete amid a landscape of high unemployment and an uncertain recovery.
“The big question that tenants have today is: ‘How bullish do I feel about the future?’” said tenant broker Harry Krausman, managing director at Colliers ABR. “If a tenant feels confident that their business is going to be better five years from now than it is today, then they are more likely to want to lock into the cheap rates today.”
James Delmonte, a vice president and director of research at Jones Lang LaSalle, said in a report last month that stronger activity in Midtown did not signal that a recovery was at hand.
“Much of the current deal flow in the market consists of renewals and relocations, neither of which will reduce current supply levels,” he wrote in the report.
Nonetheless, new office leasing in Manhattan rose 24 percent in November over the previous month, to 1.78 million square feet, the most recent figures from CB Richard Ellis showed.
In another positive sign for landlords, the availability rate, which measures space that is or will become available within 12 months, declined by .2 points to 14.3 percent, the CBRE figures revealed.
However, there was still a 1.46 percent decline in average asking rents, which fell to $49.17 per square foot in November — and are down nearly 32 percent from the high of $71.92 in July 2008, CBRE figures indicated.
One of the forces driving rents down was the return of office space once considered financially troubled to the market following a change in ownership, allowing for cheaper rents. As examples, brokers pointed to buildings such as 1330 Sixth Avenue, Worldwide Plaza at 825 Eighth Avenue, and 1540 Broadway.
Some brokers said they still avoided buildings such as developer Macklowe Properties’ 510 Madison Avenue at 53rd Street because of the uncertainty of ownership (see “Slow-motion death for commercial towers”). Office property landlord SL Green Realty bought a construction loan on 510 Madison last month, a move that was seen as an effort to gain control of the troubled new building.
“Nobody would take a tenant to a 510 Madison or a building like that, because [Macklowe Properties] is probably not going to own it much longer,” Krausman said.
However, he added, “if and when the building changes hands, they are going to do a hell of a lot more leasing.”
Jones Lang LaSalle international director Frank Doyle said leasing activity picked up at the 525,000-square-foot 1330 Sixth Avenue after Macklowe Properties defaulted on a loan, and a division of Canadian pension fund Otera Capital bought the building in a mezzanine foreclosure in April. JLL picked up the leasing assignment from CBRE after the default.
Before Otera took control, “no one felt comfortable. Brokers stayed away from that building,” Doyle said.
After getting the leasing assignment, JLL launched an aggressive marketing campaign to convince tenant brokers to show the space in a building that late last month had a 36 percent availability rate, data from commercial leasing Web site MrOfficeSpace.com showed.
It has paid off somewhat: Since taking over in April, JLL signed three leases for a modest 12,365 square feet.
Brokers differed on when large tenants would be back aggressively.
Looking down the road this year, Grubb & Ellis executive managing director Joseph Harkins expected landlords would continue to divide space into smaller units, and that large users would not start absorbing large space until next year.
“As we turn to 2011, large blocks will probably be in better stead,” Harkins said.
But Edward Goldman, executive vice president at CBRE who is part of a team that took over leasing at the 1.1 million-square-foot 335 Madison Avenue last month, said there was a jump in activity for large users at the year’s end.
“In my opinion, it is an ideal time to have an assignment like this in the marketplace,” Goldman said.
Harkins said at times the goals of a landlord trying to create a large space and a sub-landlord trying to sublease space diverged. He gave one example in Midtown at 1350 Sixth Avenue, between 54th and 55th streets, a building owned by SL Green Realty. The office landlord wanted to combine a piece of available office space with space controlled by Harkins’ client HarperCollins Publishers.
“They had a block of space that was contiguous to our space and one of their goals was the prospect of maybe a large tenant coming along to take their space [and] take our space, and become a new anchor for the building,” he said.
But the clock was ticking on HarperCollins, and it ended up making a 72,799-square-foot deal with Universal Executive Centers on what Harkins called “the largest executive suite facility in Manhattan.”
Ultimately, SL Green allowed the sublease to go through.
“It is hard enough to make one deal, but with a sublease you have to make two,” Harkins said.
Midtown
Midtown followed the pattern seen in the overall Manhattan leasing statistics, with an increase in deal volume, a decline in availability, and a drop in average asking rents.
The volume of new leasing rose by 30 percent in November to 1.2 million square feet from the month earlier, while the availability rate declined by .1 point to 15 percent, data from CBRE indicated.
But even with deal volume near the five-year monthly average of 1.23 million square feet, average asking rents fell by 1.4 percent in November to $56.06 per square foot compared to the month earlier, CBRE figures showed.
Midtown South
Midtown South showed the greatest decline in average asking rents among the three markets, even as leasing velocity was comparable to its average level.
Asking rents fell by 3 percent, or $1.26 per square foot, to $40.78 per square foot in November, with the Tribeca/Hudson Square submarket seeing the steepest fall, of $1.74 per square foot to $40.58 per square foot, CBRE figures showed.
During November, new leasing activity was 270,000 square feet, just under the five-year average of 280,000 square feet per month. The availability rate dropped slightly, by .1 point to 15.2 percent.
Downtown
Leasing activity did not fare as well Downtown as it did in the other two markets, despite several large leases signed in November.
Although one of the larger deals of the year was signed in November — a 200,000-square-foot lease by the Depository Trust & Clearing House at 55 Water Street — it was a renewal, so it was not counted in the new leasing transactions.
New leasing rose to 320,000 square feet in November, up from 250,000 in October. However, that was 18 percent below the market’s five-year monthly average of 390,000 square feet, CBRE statistics showed.
The availability rate remained flat at 11.8 percent, while the average asking rent declined by 1.6 percent to $38.63 per square foot, the data showed.
