Three years ago, with the country in the midst of a financial crisis, major global banks looked to cut costs by subletting their unneeded office space to other companies.
Just weeks after Lehman Brothers Holdings filed for bankruptcy, financial institutions like MetLife, Citigroup and Bank of America dumped more than 1 million square feet of this so-called sublease space on the market. As the downturn dragged into 2009, the total amount of sublease space peaked, with Manhattan financial services firms listing at least 4.4 million square feet by the middle of the year.
Today, news of Wall Street’s financial losses has pushed banks to take out the knife once again, looking for ways to cut back on expenses. And some real estate insiders expect those boardroom decisions to lead to another increase in sublease space in the Manhattan market. There have been small indications that it is already happening, marking a reversal of the steady decline in sublease space that’s occurred over the past two years, as bargain-hunting tenants inked deals.
“We are starting to see space creep back on the market,” said Joseph Harbert, chief operating officer for the New York region of Cushman & Wakefield. He said the firm’s researchers saw an uptick in sublease listings — which had been dropping since the recovery began in 2009 — in August.
The amount of total sublease space for Class A buildings in Midtown rose by more than 400,000 square feet to 3.6 million square feet in August, Cushman reported. That accounted for nearly all of a small, but significant, 0.1 point rise in the borough-wide sublease availability rate.
Preliminary office leasing figures for September from commercial firm Cassidy Turley also show indications of a small increase in sublease space in parts of Midtown. But Robert Sammons, the firm’s vice president of research, looking at his own research, said overall sublease space still remains at its lowest levels since the third quarter of 2008.
“Midtown West and [the] Plaza submarkets did climb slightly for [September] over August, but both are minor and still well below the July figures,” said Sammons.
Other firms, like Studley, show no rise at all yet.
But last month, several financial firms put sublease space on the market. For example, hedge fund Citadel Investment Group listed its 30,529-square-foot 48th floor at 601 Lexington Avenue. And Macquarie Holdings, a global banking and advisory firm, listed nearly 50,000 square feet on two floors at 125 West 55th Street, data from CoStar Group shows. (A spokesperson for Macquarie denied the firm was offering sublease space in the building.)
Faster last time around
In the last three months of 2008, there was a flurry of sublease space dumped on the market by financial services firms.
The United States Trust Company, a unit of Bank of America, listed 505,000 square feet at 114 West 47th Street. Meanwhile, Citigroup listed 420,000 square feet at 601 Lexington Avenue, and MetLife put 105,000 square feet at 1095 Sixth Avenue on the market. At the time, commercial firm FirstService Williams (now Colliers International) reported that a total of 1.2 million square feet of sublease space was added to the market in that quarter alone.
Ultimately, the amount of all types of sublease space in Manhattan peaked at 11.4 million square feet in the second quarter of 2009 — with about 4.4 million of that from financial services, a 2010 report from CB Richard Ellis shows.
Almost no financial firm was untouched.
JPMorgan Chase listed two major sites: 452,000 square feet at 277 Park Avenue, and 140,000 square feet at 320 Park Avenue, according to Cassidy Turley data. And Citigroup and asset management firm Legg Mason each put 97,000 square feet at 399 Park Avenue on the market (Citi also listed an additional 190,000 square feet at 485 Lexington Avenue).
Much of the sublease space was snapped up in 2009 and 2010 at fire-sale rents. For example, Chase’s space at 277 Park was carved up by a number of companies, including Japanese financial firm Nomura Holding America, financial services company Sterne Agee, and insurance firm the Hartford Financial Services Group.
As the economy improved, the firms took back some of the space themselves, including many of the largest blocks, such as the U.S. Trust Company space. Credit Suisse also took back 180,000 square feet at 1 Madison Avenue and 315 Park Avenue South that it had listed in the immediate aftermath of the Lehman collapse.
So far there has been no mad rush for the door. Cushman’s Harbert said he did not expect a wholesale space dump like the one that shook the market three years ago. Through August, there was only about 1.4 million square feet of financial services sublease space on the market, Cushman data shows.
But there have been significant reports of job losses. Last month, Bank of America announced it would lay off 30,000 people globally, and other Wall Street firms like Goldman Sachs, Citigroup, Barclays and UBS have started cutting staff.
The financial services sector in Manhattan lost 3,700 positions between April and August of this year, according to Barbara Byrne Denham, chief economist with commercial sales firm Eastern Consolidated.
“I could foresee at least 5,000 additional [job cuts] over the next six to 12 months in financial services,” she said. Using a general measure of 200 square feet for every employee, that would mean 1 million square feet of office space was no longer needed.
Still, layoffs in and of themselves don’t necessarily lead companies to give up office space.
“You won’t see a lot of space coming back on strictly because of layoffs,” Harbert said. “It will be institutions that are long on space that will put some space back on the market, but very selectively.”
Robert Goodman, an executive managing director at Colliers International, said he did not expect the U.S. banks to dump as much space this time around. In part, that’s because they got burned last time when they listed space, then realized that they needed it again as the economy improved. Plus, many firms lost money on subleasing, because they leased out the space for less than they owed their landlord in rent.
Foreign banks may be the next to unload, he predicted.
“I sense that some of the major foreign-based institutions, who have been hesitant to date putting sublease space on the market, will be more likely do so in the next year,” said Goodman. “Whether it is a Credit Suisse, a UBS or a Deutsche Bank, as these foreign institutions reassess their allocations of capital, there clearly will be sublease opportunities.”