Office market chugs along

Despite Sandy, end-of-year deals and leasing are on pace with years past in Manhattan market

Dec.December 01, 2012 07:00 AM

In a weird twist, Hurricane Sandy made no measurable impact on November’s office leasing numbers. That’s despite the storm rendering nearly 20 million square feet of office space unusable as of late last month.

Just after the storm hit, brokers worked feverishly to find alternate spaces for their clients, unsure how long they would be out of their offices. But instead of signing new leases, many large companies moved to their firm’s own satellite offices, used spaces borrowed from friendly business associates or clients — or had employees work remotely.

“What we found was that the vast majority of [displaced tenants] used contingency plans that they [would] put in place for any disruption,” said John Wheeler, managing director at commercial firm Jones Lang LaSalle.

“I think some things slowed down, but I don’t see any of the major activity disrupted, and it feels relatively typical for the year end, when you get a disproportionate amount of the leasing done,” Wheeler said.

Overall, Manhattan leasing figures remained steady in November, preliminary statistics from commercial firm Cassidy Turley showed.

Meanwhile, the availability rate — which tracks space vacant now or that will become available in the next six months — remained at 10.3 percent last month, unchanged from October. And the average asking rent rose by just $0.02 per square foot during that same time, to $56.84 per foot.

“[The broad market] is still flat right now,” said Jeremiah Larkin, a senior vice president at Downtown’s largest landlord, Brookfield Office Properties.

But he added that he’s negotiating deals that could close before the end of December or January. “Since Labor Day, we have seen an uptick of activity, including space tours and proposals,” he said.

After a month of feverish repair work in the wake of the late October storm, the amount of shuttered Lower Manhattan office space fell to 20 million square feet from 35 million square feet as of Nov. 26, according to JLL. That is out of a total 101 million square feet of office space Downtown.

Many more Downtown buildings are expected to return to service this month (see related story, “Landlord losses”), but some could be unusable for months, according to news reports.

Speaking to why there weren’t more short-term leases, insiders said it generally doesn’t make sense to relocate a major operation for only a few weeks. That’s partly because sometimes the move itself can take a month.

One long-term impact of working in borrowed spaces during the Sandy fallout could be that more firms latch onto the popular trend of moving employees into a smaller footprint, brokers said.

Indeed, coping with Sandy has given some executives looking to save on rent an opportunity to turn to staff who doubled up in space, and say, “‘We survived, it wasn’t so bad,’” said David Hoffman, executive managing director at Cassidy Turley. Although, he added, some may have disliked the close quarters.

Another impact the storm is having on the market is that build-outs for tenants who are constructing or reconstructing space are getting delayed and costs are rising, said Gordon Ogden, a broker and principal at the Midtown-based real estate firm Byrnam Wood. The reason? Contractors have been tied up with Sandy repairs.

“The demand for labor contributed to some slower [build-outs] and is increasing costs for those installations,” he said.

In addition, tenants (and potential tenants) are more closely scrutinizing where mechanical systems in buildings are located.

“Tenants are asking, ‘What are you doing to make sure it does not happen again?’ ” Brookfield’s Larkin said.



Even as some Downtown firms squeezed into shared Midtown spaces because their regular offices were shuttered, a few firms inked temporary deals.

For example, the New York Daily News, which is headquartered in 4 New York Plaza, a building that may be closed for a year, put several dozen of its advertising employees in a month-to-month lease. The temporary 3,000-square-foot space is at 1441 Broadway and was leased through the executive suite firm Jay Suites, said one real estate professional familiar with the Broadway building.

Non-Sandy deal-making in Midtown continued as well.

What appears to be the largest lease of the month was a bit of an anomaly, however. It was a sale-leaseback transaction in which Spanish lender Banco Santander International sold its 113,000-square-foot building at 45 East 53rd Street for $120 million to a Florida-based company, as The Real Deal reported last month, and then inked a 20-year lease to remain in the building.

In addition, several large blocks of sublease and direct space hit the market.

“It feels like more space is coming online than is being taken offline,” said Hoffman. “And when that happens, and tenants know it is happening, they lose their sense of urgency to complete leases.”

The largest was financial firm AllianceBernstein listing 203,756 square feet of sublease space at 1345 Sixth Avenue. There was no published asking rent.

Meanwhile, Aby Rosen’s RFR Holding listed 189,647 square feet at 350 Madison Avenue, according to Cassidy Turley’s figures. Data from CoStar Group shows an availability rate of 54 percent in the building — far higher than the Midtown average.

Indeed, the overall availability rate in Midtown jumped by 0.2 points to 11.3 percent from 11.1 percent in October. Average asking rents fell by $0.29 per square foot last month to $64.21 per foot.

Midtown South

Though not hit as hard as Downtown, most of Midtown South was left without power for a week after the storm, and tenants scrambled to find office space for that period. But by the first full week in November, most office buildings had their lights back and real estate professionals were back to work.

For instance, Newmark Grubb Knight Frank brokers listed 255,000 square feet in two adjacent buildings that investment firm Savanna acquired in November at 245-249 West 17th Street.

Also, as TRD reported last month, Westchester-based computer giant IBM signed a sublease in Midtown South in late October. The company will take 54,045 square feet (the entire eighth floor) at 63 Madison Avenue, between 27th and 28th streets.

CBRE Group brokers represented both the sub-landlord, WestPoint Home, a company that makes home products like pillows and sheets, as well as IBM. IBM is moving from a larger space in 11 Madison Avenue, information from CoStar shows.

Sources said the lease, which runs through June 2019, starts at $32 per square foot and includes six months of free rent but just $10 per foot in construction costs.

The average asking rent in Midtown South rose by $0.62 per square foot in November to $49.35 per foot, while the availability rate declined by 0.1 point to 7.8 percent.



Brokers say, despite the fact that many buildings are currently out of commission because of Sandy, there won’t be a long-term impact on the Downtown market.

“The demise of Downtown has been greatly exaggerated again,” said Brookfield’s Larkin, referring to damage from Sandy.

Brookfield has 12.8 million square feet in Lower Manhattan yet suffered little damage — except at 1 New York Plaza, which was closed for several weeks but reopened last month.

Others said the relatively low rental rates in Lower Manhattan will continue to attract tenants.

Marc Shapses, an executive managing director at commercial firm Studley, said with concession packages, tenants can sign leases with effective rents under $20 per square foot. That’s often lower than the rent would be at an equivalent building in Midtown or Midtown South, he said.

“Downtown already is the best value for quality buildings in the city,” Shapses said. “[Tenants] will continue to think of Downtown as an option.”

Average asking rents in the area are nearly $10 below the average in Midtown South and nearly $25 below Midtown. But the average asking rent Downtown did creep up last month by a slight $0.11 per foot, to $39.95 per foot, Cassidy Turley statistics revealed. During the same period, the availability rate remained steady at 10.4 percent.

Despite the noise and confusion from generators, hoses and vents snaking out of Lower Manhattan buildings to deal with the Sandy aftermath, tenants still inked new leases in the area.

A Studley team of David Goldstein and Greg Taubin represented law firm Sedgwick, which inked a deal to sublease the 39th floor of 125 Broad Street to another law firm, Holwell Shuster & Goldberg. Holwell is currently located on the ninth floor of 335 Madison Avenue. In addition, the 38th floor, which Sedgwick also occupied, was returned to the owners of the commercial condo space, law firm Sullivan & Cromwell. That law firm occupies much of 125 Broad.

TRD reported in August that Sedgwick inked a deal to relocate to 43,374 square feet at 2 World Financial Center.

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