Michael Stoler — Cautious optimism for the office leasing market

<i>But concessions still key to grabbing tenants</i>

It’s hard to generalize when it comes to Manhattan’s office market, which has more than 400 million square feet of office space. Still, more real estate professionals are talking about the market bottoming out. Stephen Siegel, chairman of global brokerage services at CB Richard Ellis, feels that we have reached the bottom. In February, the firm announced that Siegel was its top-producing broker in 2009, handling 2.5 million square feet of leasing transactions. Siegel’s good friend Bruce Mosler, the co-chairman of Cushman & Wakefield who is now serving as advisor to Cohen Brothers Realty and NYU Langone Medical Center, concurs that the market has probably reached bottom.

The chairman of the tri-state region of Grubb & Ellis, David Arena, agrees that things are improving. He said that “leasing activity is much better” this year, although pricing is certainly down from 2006 and 2007.

A group of prominent leasing professionals who appeared on my television show last month — including Joseph Harbert of Cushman & Wakefield, Matthew Van Buren of CB Richard Ellis and Mark Boisi of Cassidy Turley — are cautiously optimistic that the market has reached bottom. However, the fourth member of the panel, Mark Weiss, vice chairman of Newmark Knight Frank, feels that difficult times are definitely ahead for at least the next 12 months.

“With unemployment continuing to grow, coupled with a trend by tenants to reduce the amount of office space needed to operate their business, I am not overly optimistic that we have reached the bottom in office rents,” Weiss said.

Peter Turchin, executive vice president at CB Richard Ellis, sees a pickup in volume in the office market. “There were virtually no new leases signed during the last six months of 2008 and the first half of 2009. But over the last couple of months, [there was] lots of activity, with prices down by 30 to 45 percent.”

It continues to look like a good time for tenants to negotiate leases. Anthony Westreich, the president and CEO of Monday Properties, owner of the landmark 230 Park Avenue, said: “Tenants are taking advantage of the market, and continue to have the opportunity to sign leases at reductions of net effective rents of close to 40 percent.” The leasing market continues to be slow, he notes, yet “no longer are landlords desperate to sign new leases.”

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Turchin added, “It is a fantastic time for tenants … Previously many of these tenants [we see] were sitting on the sidelines waiting, and now they are asking leasing professionals, ‘How do I get into the market?'”

Many people would be surprised to learn that most of the leading office brokers feel that the most aggressive parties in offering incentives to gain near-100 percent occupancy are office real estate investment trusts and the prominent New York families who own office buildings. For example, firms including SL Green, Boston Properties, Brookfield Properties and Vornado have been aggressive in providing tenant incentives.

Today, tenants can secure Class A office space on Park Avenue for as low as $50 per square foot, coupled with concessions of free rent for up to one year. Boisi noted that completely renovated sublease space at the Mutual of America Building at 320 Park Avenue is available for rents of $50 per square foot with long-term concessions.

According to the PricewaterhouseCoopers Korpacz Real Estate Investor Survey, for the first quarter of 2010, investors surveyed indicate an increasing need to offer prospective tenants free rent during lease negotiations, as relatively weak tenant demand still lingers. For the Manhattan office market, the survey noted that tenants can secure as much as 12 months of free rent, with an average of 7.8 months of free rent on a year lease term.

Daniel Blanco, COO and principal of Broad Street Development, owners of 55 and 61 Broadway, said: “Today we are back to basics; a landlord must meet and serve a tenant’s needs.” He told me that an insurance company recently executed a 15-year lease in a Class B office tower in Lower Manhattan for a rent of $35 per square foot with 15 months of free rent and a full build-out.

Looking forward to the end of 2010, Turchin believes activity will be up. Blanco sees a great number of lease renewals, and expects a controlled decline in rents by 5 percent to 10 percent. Arena feels that firms that had previously moved to the suburbs for lower rents will be returning to Manhattan due to the cost differential.

In conclusion, it looks like the consensus is that office market activity will gain momentum, while concessions for free rent and tenant improvements will decline. I must concur with Westreich, of Monday Properties, when he says: “What must go down must come up.”