The Real Deal New York

9 out of 10 brokerages disagree: Why reports offer wildly different takes on the state of Manhattan’s office market

TRD explores what exactly makes the leasing numbers so cloudy
By Rich Bockmann | July 28, 2017 07:00AM

At the halfway point of the year, Cushman & Wakefield offered some encouraging news on the much-debated health of Manhattan’s office-leasing market. The firm reported that the 15.4 million square feet leased through the first six months represented a 13 percent increase from the same time last year.

But then Avison Young released its first-half report saying that leasing activity was actually down 14 percent year-over-year. That’s an almost 30-point spread between what one brokerage determined was a slumping market and another saw as robust.

Experts said it’s common for different brokerages to form their own methodologies and include or exclude certain types of leasing statistics, which can further cloud the debate on how healthy the market really is.

“It’s all accurate information. It’s just a question of what the basis is that they’re using,” said Jeffrey Schotz, the head of leasing at SJP Properties. “To a large degree it falls down to how they manage the statistics.”

Overall leasing activity is just one of several key data points the brokerages disagreed on. CBRE, for example, pegged absorption through June at negative 2.74 million square feet, meaning leases weren’t being signed at a rate robust enough to keep pace with the new supply coming to market. JLL, on the other hand, reported positive absorption at nearly 570,000 square feet.

And Colliers International had the availability rate for the first half of the year at just a hair above 10 percent, what’s largely considered to be the equilibrium between a market that’s weighted in favor of either tenants or landlords. But Newmark Knight Frank had the availability rate in the second quarter at 12.6 percent, suggesting that tenants had the upper hand in negotiations.

Even after a close reading of the most recent batch of real estate market reports, one would be hard-pressed to get a clear answer on how key market metrics are performing and what direction the market is heading.

“I think the market is kind of in flux now,” said Meyer Equities principal Eric Meyer, “and what you usually do is look introspectively at your own portfolio.”

“[The brokerages] have a different baseline for information to form a perspective that they want it to show,” he added. “The different firms have their own agendas. Everyone wants to push their own perspective on the market.”

Behind the numbers

Many of the discrepancies in the reports can be explained by the methodologies the different firms employ.

CBRE, for example, doesn’t count renewals towards its leasing activity, reasoning that renewals are often a function of the lease expiration date, rather than an indicator of demand from tenants.

Tallying renewals can also make it difficult to account for how that space would theoretically be counted toward availabilities.

“If a tenant renews and the space is never on the market, it makes sense to keep that activity separate because it’s not going to show up in the availability numbers,” said CBRE research director Nicole LaRusso, who added that there’s not always a right and wrong answer when it comes to making decisions on methodology. “There’s no perfect way to separate all this stuff out. It’s just sort of the tradition here.”

Colliers, on the other hand, does include renewal activity in its leasing totals. If News Corp. and 21st Century Fox had not backed out of a deal to lease over 1 million square feet at 2 World Trade Center, the brokerage’s researchers argued, the deal would have had a reciprocal effect in Midtown. So discounting their 1.2 million-square-foot renewal on Sixth Avenue wouldn’t truly reflect activity in that market.

“If a tenant renews, for the most part, the block never comes on the market,” explained Franklin Wallach, managing director of Colliers research in New York. “But if they didn’t renew, that space would be added to available inventory and would affect pricing and absorption.”

Colliers also tracks buildings in Manhattan with 25,000 rentable square feet and above, whereas JLL only tracks Class A and B buildings. As a result, JLL looks at a market of roughly 451 million square feet, while Colliers culls data from a market of 510 million square feet – the largest among the city’s commercial brokerages.

“This large sample set provides us a comprehensive view of the whole market not just selected pieces,” Wallach added.

And even if the brokerages can agree on which deals to include, they don’t always agree on when to include them. Many of the firms have already counted asset manager Blackrock’s deal to take 847,000 square feet at 50 Hudson Yards as closed in the first half of the year. But it appears that the deal is still in the prelease stage and JLL, which represents Blackrock in the negotiations, has not yet counted it as completed in its leasing report.

Industry insiders said that firms with large segments of their business devoted to representing landlords – such as CBRE or Cushman – will probably have a different perspective on the market than a company like Savills Studley, which exclusively represents tenants.

So, what is the industry to make of all this conflicting information? It’s not a trade secret that Manhattan is adding millions of square feet of new office space, and that tenants continue to ink deals to relocate to places like the Far West Side and Downtown.

There’s recently been debate about the strength of the market, with some brokers reportedly saying a few big deals are masking weakness in the sub-100,000-square-foot segment, a claim some of the brokerages deny.

Steven Durels – the leasing director at SL Green Realty, the city’s largest office landlord by square footage – said that brokerage reports are good for taking the pulse of the market, but he primarily relies on information from his own portfolio.

“I think the reports are a good barometer but always need to be balanced against the feedback we receive at any one time from prospective tenant leads and leases in negotiation within our own portfolio,” he said.

SJP’s Schotz said he follows the same strategy, but when it comes to studying different submarkets he’ll often pick different brokerage reports for different areas – but always stick with the same one.

“What we do as owners, in order to have consistency, is we pick a horse and generally follow that firm’s results,” he said. “That way, at least we’re seeing a consistent analysis.”