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Big block leasing activity taps the brakes

Large office tenants may have felt like they were playing a game of musical chairs through the first quarter of 2007: that if they didn't grab a space when presented with one, they might be left empty-handed.

That game has apparently concluded. Large users of office space are no longer rushing headlong to lock in a good deal. According to data compiled by the commercial brokerage Colliers ABR, while companies in New York City leased 42 spaces of 100,000 square feet or larger in 2006, this year, through last month, firms had leased only 29 spaces of 100,000 square feet or larger, a drop of almost 31 percent.

Since the securities sector typically accounts for about a third or more of the leases for larger blocks of space --- 100,000 square feet and above --- a crisis related to mortgage lending has sent the demand for larger office spaces spiraling downward, brokers said.

"Certainly, the credit crunch caused a sea change of caution among those in the financial services industry that were taking these large blocks of space," said Mark Friedman, a vice chairman at the commercial real estate firm GVA Williams.


Staying put

According to Colliers ABR's data, besides there being fewer leases of 100,000 square feet or greater this year, more of them were lease renewals as opposed to relocations. In 2006, lease renewals accounted for about 26 percent of the leasing activity among larger office spaces, while in 2007, lease renewals accounted for almost 38 percent of the leasing activity among larger spaces.

"That's due to a number of reasons, but first and foremost is the high cost of construction, which affects both the landlord and the tenant," Friedman said. "A landlord's replacement costs for a tenant are so high, he might be a little more amenable to making a deal to retain a tenant than he was six months prior."

The number of large office leases peaked in the first quarter of 2007, and then steadily declined, according to data from GVA Williams. Brokers said that astronomical rents per square foot in Manhattan, which more and more hit three digits, first for smaller spaces and then even for larger spaces earlier this year, may have induced hesitancy in companies that typically take larger spaces, creating a slowdown in leasing velocity.

"It was very rare to see large transactions done, forget about north of $100 a foot, but above $80 a foot, until very recently," said David Goldstein, an executive vice president at the commercial real estate firm Studley. "Over the last, let's say, six to 12 months, there have been a handful of larger deals that had triple digits in front of them, which was exceedingly rare."

Those steeper prices may have played a role in discouraging leasing activity in the commercial market, brokers said.

"I attribute the slowdown in leasing to the first half of the year when there was a defined spike in rents and there was this stalemate going on, with landlords and tenants staring each other down and saying, 'Who's going to blink first?' " said Matthew Astrachan, an executive vice president at the commercial brokerage Cushman & Wakefield.

Other brokers denied that any recent sluggishness in leasing activity, including among the large office-space users, has occurred, asserting that many large deals are about to be clinched imminently.

"There are still a lot of leases that I'm working on, and that a lot of other people are working on, that haven't been announced, but will be by the end of the year," said Ken Meyerson, a senior vice president at the commercial brokerage CB Richard Ellis.

Still, most brokers agreed that the credit crunch is causing companies in the securities industry to take a pause. While financial services and insurance companies accounted for 19 of the leases of spaces 100,000 square feet or larger in 2006, or more than 45 percent, the same type of companies signed on for only 11 of the large spaces leased in 2007, or about 38 percent, according to Colliers ABR data.

Law firms, especially those supporting financial services companies, were once a strong force among those companies taking large spaces, but this year their leasing activity has fallen off, according to some brokers.

(But not all brokers agree. See Lawyers make their case for office space from the November issue.)


Media companies rule

Thus far, media companies have reigned ascendant. In 2006 only about 7 percent of the large leases were closed by media companies, but in 2007 almost 21 percent were.

"As far as large leases go, I think you've seen broadcast and media certainly very hot this year," said Robert Sammons, managing director of research at Colliers ABR.

Many media companies ended up taking space in Midtown South, primarily in the Hudson Square submarket, where landlords had been sitting on smaller spaces that had been vacated by tenants with the long-term goal of combining spaces to create large chunks of premium office space, brokers said.

Because of that maneuver, the number of large blocks of office space is now on the rise, said Joyce Geiger, executive managing director of consulting at the commercial brokerage GVA Williams.

"The availability of large blocks is on the increase now," she said, pointing out that in the fourth quarter of 2006, there were about 14 blocks of space over 100,000 square feet, but by the third quarter of 2007, there were about 22 blocks.

Much of the growth in large spaces "has been in Midtown South, where, in a response to a shortage of larger spaces, the landlords have been hoarding space to assemble large blocks so they can put them back on the market to attract the large users," she said.

Yet even given the availability of large blocks of space, many companies may be loath to relocate in such an expensive market. Goldstein agreed that escalating construction costs may keep companies in place.

"Particularly what you start to see in markets like this is companies become more capital-constrained and, therefore, moving becomes tough to justify because you've got to deploy capital to build a facility," he said.

Once the market reaches a point where firms stop moving, if business doesn't pick up, the next step is to shed space in an attempt to maintain the status quo. If companies have layoffs, they may put space on the market for sublease to keep themselves afloat. That could happen over the next few months, industry insiders said.

"Right now, companies may be more in a layoff mode than a hiring mode," said Richard Brown, co-head of the leasing department at the law firm Herrick, Feinstein LLP. "Obviously, you don't take space unless you need it, or you project you need it. What may be happening is the opposite of that."

Brokers at GVA Williams say they've already seen sublease space come back on the market.

"You're seeing an increasing amount of sublease space of all sizes coming back on the market" in the last couple of months, Geiger said. "It's consistently increasing."

That means larger tenants might do well to wait it out a bit, Friedman said.

"About six months from now will be an excellent time for a 100,000-foot tenant to enter the market," he said. "They'll have about 30 spaces to choose from, and that's terrific for a large tenant."

Even if there are fewer large office-leasing deals to go around, leasing brokers said they have not lost their bread and butter: the 20,000- to 50,000-square-foot deals. While they might love to clinch the big deals for the publicity, smaller deals are the real income producers, Astrachan said.

What has changed, Friedman said, is that brokers who represent office tenants may have more negotiating power.

"It's going to be probably a better time for a tenant rep broker, and not as good a time for a landlord rep broker," he said. "The tides are shifting."

Go to Chart: Big deals grow more scarce