The Real Deal New York

Manhattan office vacancy rates rise

Wall Street job cuts may add more space in coming months
By James Kelly | March 31, 2008 02:23PM

Conventional wisdom has predicted that once Wall Street’s troubles manifest themselves in job losses, the office market will begin to feel the heat. And last month saw Lehman Brothers announce it will lay off 5 percent of its global workforce, along with JPMorgan’s stunning purchase of Bear Stearns, with predictions that at least one-third of the bought-out firm’s 14,000 employees will get cut.

Adding to the grim news last month:
Citigroup reportedly said it would cut another 2,000 jobs, on top of a January announcement of 4,200 layoffs. The layoffs, mostly in its investment banking unit, will largely affect the bank’s New York and
London offices.

And more pain is expected to be on
the way.

“We haven’t seen the major shakeout in job numbers yet,” said Robert Sammons, managing director of research at Colliers ABR. “I don’t know when we will, but I expect it will be in the next couple of months.”

But job cuts or no, vacancy rates have already seen a rise in Midtown, Midtown South and Downtown in February from the month before.

The borough’s vacancy rate was up 40 basis points to 5.2 percent in February, from 4.8 percent the month before, according to data from CB Richard Ellis. It was still slightly lower than its rate of 5.4 percent in February 2007.

Asking rents also increased in all three markets, according to the data. Experts say that a lag exists between when space comes on the market and when rents soften to reflect the surplus. Another possible explanation for strong rents in the face of rising vacancy is that concessions, such as months of free rent or construction allowances, are already reducing the effective rent tenants pay without changing the recorded asking price per square foot.

The average asking rent in Manhattan was up 67 cents to $69.56 per square foot in February, from $68.89 per square foot the month before. It was up almost $13, over 22 percent, from $56.64 per square foot in February 2007, according to CBRE’s statistics.

Citigroup, iStar Financial and Bear Stearns are expected to dump a combined 610,000 square feet of space onto the market in the near future, according to Crain’s New York. The publication also reported that after its announced layoffs, Lehman Brothers could unload around 400,000 square feet of office space.

“The good news is, there hasn’t been an overabundance of new construction in the commercial market recently,” said Michael Heaner, managing director of the Kaufman Organization. He suggested that the lack of new space will act as a cushion and “facilitate a fast recovery” in the likely event of vacancy increases (see related story on page 86).

Meanwhile, speculation abounds as to what JPMorgan will do with the 1 million square feet of office space it has garnered in the trophy of 383 Madison Avenue that came in the Bear Stearns deal. Sammons, who is not personally involved with JPMorgan, guessed that even with the firm’s expected layoffs, JPMorgan would be more likely to occupy such a “coveted space” than to sublease it, and would first rent out at its other locations or at secondary Bear Stearns office buildings received in the trade.

Manhattan’s leasing activity was down to 1.32 million square feet in February, from 2.20 million the month before. It was 1.15 million square feet in February 2007.

“[Tenants’] sense of urgency in the leasing market that we saw six to nine months ago has subsided, and there is a little more patience out there,” said David Menaged, director of Adams & Co. Real Estate. “In the first quarter, we have seen more space in all sizes become available — we are no longer in a frenzied market.”

Menaged said that the cooling demand will result in downward pressure on asking rents, with a full recovery of Manhattan’s market in a time frame of two years.


Leasing activity in Midtown was down to 1.02 million square feet in February, from 1.77 million square feet the month before, according to CBRE data. It was down from 1.15 million square feet in February 2007.

The average asking rent in Midtown
was up 35 cents in February to $84.27 per square foot, from $83.92 the month before, and up from $68.32 in February 2007, CBRE reported.

The vacancy rate went up to 4.7 percent in February, from 4.5 percent in January. Midtown’s vacancy rate was 4.8 percent in February 2007.

Midtown South

Midtown South’s average asking rent leapt $1.85 between January and February, to $52.94 per square foot. In January, the average was $51.09, after a $1.16 drop from the month before, according to CBRE.

Industry experts told The Real Deal that Midtown South was the office market with the most promising near-term prospects. Heaner said the Kaufman Organization is “very bullish on Midtown South,” and Menaged agreed that it is the healthiest market. “Tenants continue to consider this area very desirable due to its great access to transportation, affordable rents and quality buildings,” Heaner said.

Leasing activity fell to 130,000 square feet in February, from 210,000 the month before, according to CBRE’s report. The vacancy rate climbed to 6.5 percent in February, up 40 basis points from 6.1 percent in January, CBRE reported. The rate was 5.3 percent in February 2007.


Downtown’s leasing activity fell to 160,000 square feet in February from 220,000 square feet the month
before, and 510,000 square feet a year before, according to CBRE’s report.

The vacancy rate in Downtown was up 80 basis points in February to 5.7 percent. It was 4.9 percent in January 2008 and 7.1 percent in February 2007.

The average asking rent was $48.91 per square
foot, up from $47.64 per square foot in January, and
$42.44 per square foot in February 2007, according to CBRE statistics.

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