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Manhattan office market: Thankful holidays are over

Commercial leasing activity was thin in the typically slow month of December, as landlords held off listings until the New Year and potential renters waited for better deals.

David Berley, chairman and managing partner of property management firm Walter & Samuels, said he was holding back listing a 65,000-square-foot space at 80 West End Avenue in Lincoln Square because the anemic activity of the holiday season made it a bad time to introduce property.

"We are waiting for the new year, but not because of the economy. We would be pretty silly to come out right now. It would be better in January when people are around," he said in late December.

The industry was further spooked last month by the alleged $50 billion fraud by fund manager Bernard Madoff and the arrest of Marc Dreier, law firm Dreier's founding partner, who was accused of swindling investors out of $380 million or more.

Although both alleged scams involved real estate, they were not expected to have an immediate affect on values. And the office space that Madoff leased in the Lipstick Building at 885 Third Avenue and that Dreier has in 499 Park Avenue will be tied up in legal wrangling for some time.

"It is on everybody's radar screen," said Richard Bernstein, vice chairman at commercial brokerage Colliers ABR. But no one was looking to lease their space — yet, he said. "That usually takes some time. I think it will be a hotter topic in 2009."

Average asking rents in Manhattan fell in November 57 cents from the month earlier to $68.53, but still remained higher than the $67.17 at the same point a year prior, according to the most recent data available from CB Richard Ellis.

But leasing activity was a scant 1 million square feet in November, just 48 percent of the volume in the same month in 2007. Vacancies rose from 6.6 percent the month earlier to 6.9 percent in November, the CBRE data showed.

Bernstein expected the overall supply of office space in Manhattan to jump by 1 to 2 percent, or another 5 to 10 million square feet, in the first quarter of 2009.


Midtown

Average asking rents declined in Midtown by 84 cents to $80.87, in part because of the reduction in asking rents by 14 percent for 86 blocks of space totaling 1 million square feet, CBRE said in the report. Vacancies rose slightly to 6.6 percent from 6.3 percent the month earlier.

Looking ahead, asking rents in Class A properties will decline by 25 to 30 percent by the end of 2009, said James Delmonte, vice president and director of research for the New York office of Jones Lang LaSalle.

But he said that prices in the higher end, trophy buildings that now average about $120 per square foot, would fall less. "There will be some decreases in rents in trophy properties, but they typically outperform the market. There is always a desire to be in those properties," he said.


Midtown South

While asking rents in Midtown were lower than asking rents at the same point a year prior, rents in Midtown South and Downtown remain above their year-ago levels.

Average asking rents in Midtown South were $52.46, off 31 cents from the month earlier, but still up from $51.07 the year prior, CBRE figures show. The vacancy rate rose in November to 7 percent, 0.5 percent higher than the month earlier and a sharp uptick from the 5.4 percent rate recorded in November 2007, CBRE data showed.

Rent pricing has held up better in Midtown South, where there are more Class B buildings with tenants with less direct exposure to the financial turmoil on Wall Street, Bernstein said. But he expected that toward the middle of 2009, rents will begin to decline at an accelerated pace as those firms are further weakened by the overall economy.

In Soho, landlord Zar Property NY, which owns and manages about 200,000 square feet of commercial space in the neighborhood, has been dueling with a prospective tenant that is offering lowball figures in a building that is about 85 percent leased.

Zar had been offering office space for about $55 a square foot earlier in 2008, then around September cut that by a few dollars. Now, possible renters say they want to pay in the low $40s per square foot. David Zar, a vice president and partner in the company, which owns 4 million square feet of residential and commercial space nationally, said they will not go that low. "Tenants hear all the bad news, and they see an opportunity to make a lower offer ... and make demands that a year ago would have been outrageous," he said. One example he said was a full year of free rent. "We don't have to give in to tenant demands yet."


Downtown

Average asking rents Downtown declined by 93 cents in November to $49.19, while vacancies rose 0.1 percent to a rate of 7.4 percent, according to CBRE. At the same time, November leasing activity was 140,000 square feet, a 69 percent slide from the five-year monthly average of 450,000 square feet.

The drop in prices Downtown was mainly caused by new blocks being introduced to the market, and not by repricing of already available space, as has happened in Midtown, the report said.