While the turmoil on Wall Street has clearly claimed its share of commercial real estate victims in the city, one bright spot may be the office leasing market.
Though the sales side of the business has seen a tremendous drop-off, downsizing and penny pinching on the part of New York City tenants is prompting a game of musical office spaces that has spurred some activity for leasing brokers.
Those interviewed for The Real Deal’s Q & A this month said, while sales brokers can “probably take an 18-month vacation,” leasing brokers will “benefit from the turmoil.”
There are, of course, tenants who are just waiting out the economic slump, but brokers say other companies looking for space recognize that they now have leverage over landlords when it comes to negotiating rents.
Part of the leasing activity can be attributed to the companies that are looking more closely at their bottom lines and downgrading to cheaper office space as their Midtown leases come up for renewal. But, it’s also because investment banks and finance firms like Citigroup, Lehman Brothers and JP Morgan are looking to sublet some of the scarce Class A space in Manhattan and some smaller companies that are still on good financial footing, including some hedge funds and private equity firms, are actually looking to expand.
But brokers note that competition is fiercer and that they expect to go after a higher number of smaller transactions than they have in the past just to stay in the game. They also say that successful brokers will learn to diversify into different areas, including management consulting, to avoid getting pulled down by the market.
For more on this and how retail and hotel brokers are faring, we turn to our experts.
Eugene Giscombe principal, Giscombe Realty Group
What is the most positive trend when it comes to working as a commercial broker in today’s market?
That small to medium-size companies are still in the market for office space despite the downturn in the economy.
What is the most negative trend?
The growing number of retail vacancies throughout Manhattan due in part to the high rents landlords are seeking, coupled with slowing retail sales growth in many sectors.
What area of the commercial real estate market is it best to be working in right now?
Office leasing. Many Midtown firms are finding renewal rents prohibitive, which provides brokers with opportunities to advise and place these firms into alternate space at more acceptable rents. Sublet space entering the market provides additional opportunities to those firms seeking to relocate within [close] proximity to their existing location.
Is the number of people working in the field thinning, staying the same or growing?
Many people leave the business when there is a slowdown. Those who leave usually have little invested in their career or are not yet established in the business.
What is the most successful way brokers are adapting to the changed market?
By diversifying into different areas of real estate such as management consulting.
What is the least successful way?
Continuing to conduct business in the same manner, hoping the market will change.
What’s the best piece of advice you’ve heard when it comes to dealing with down markets like the one New York is facing now?
Real estate brokers should invest in real estate that provides a steady cash flow to carry them through the periodic downturns in the marketplace.
Grant Greenspan principal, Kaufman Organization
What is the most surprising trend when it comes to working as a commercial broker in today’s market?
That there are still pockets of activity in certain fields such as software, medical, home health care and health insurance for office space expansion.
What is the most positive trend when it comes to working as a broker in today’s market?
You have in each neighborhood a micro market. Some of the more entrepreneurial, long-term owners, not the institutional owners, will tend to meet the market ahead of the curve and can make a meeting of the minds with the customer. That owner is willing to break price in order to achieve a tenant in this down market.
What is the most negative trend?
Dealing with the lack of velocity in the market [and] the lack of activity and the indecisiveness of a lot of customers due to where they believe their business is going to be. If they are able to stay in their current location, they will do so.
What area of the commercial real estate market is it best to be working in right now?
I believe all areas are hit by the current economic conditions. I still believe the leasing market will benefit from the turmoil. As space comes on the market, if you are diligent and identify customers, there will be activity. One positive aspect is that there is more sublease activity with built office space coming to the market. If you are able to identify that customer over the next 12 months, they will take four- or five-year leases. That’s where your activity is going to come from.
What area of the commercial real estate market is the worst to be working in right now?
I believe sales and financing. The market is pretty much flat right now.
Is the number of people working in the field thinning, staying the same or growing?
There is a slight thinning, although by the fourth quarter, we will see the most thinning of the industry. After the summer, if they don’t make their numbers by the end of the year, they look to get out of the industry.
What is the least successful way brokers are adapting to the changed market?
Brokers that wait for the phone to ring and do passive advertising, posting potential spaces [rather than] reaching out to the decision makers, and waiting for the decision makers to contact them about getting space [are going to be least successful]. We have reached the point again where the customer is the commodity and not the space.
What do you expect to see going forward when it comes to brokering in Manhattan?
We are going to see a lot of brokers at different firms chasing very little business and significant price-changing with the addition of subleases coming to the market. We’ll see a general philosophy change in how we negotiate with customers. The pendulum has swung. Customers are in the driver’s seat in negotiations. I don’t believe that landlords and building agents are of that mindset just yet.
Amy Fox senior director, Cushman & Wakefield
What is the most surprising trend you’ve seen as a commercial broker in today’s market?
Larger leases sustained leasing activity during the first half of the year. We ended the second quarter with overall leasing activity down just 2 percent from this time last year.
What area of the commercial market is it best to be working in right now?
The office market has seen a slight increase in vacancy, but at 7.1 percent, we are still at relative equilibrium. Surprisingly, rents have actually risen over the past few months. In retail, the primary submarkets continue to see increases in rental rates, particularly in Soho and on Fifth Avenue. Little supply and continued demand from overseas retailers have kept the market from seeing significant increases in vacancy. In the investment sales market, activity is most certainly down from this time last year. However, several transactions that were either closed or put into contract last quarter provided new data points and gave investors some confidence in the Manhattan market. Foreign investors also continue to play a significant role in the investment sales market, having accounted for nearly half of all investment sales activity at mid-year.
What do you expect to see going forward when it comes to brokering in Manhattan?
We expect to see some more space become available and believe that rents will begin to flatten. However, developers have been conservative over the past few years. And, given the short supply of modern, Class A office space, we expect that over the long term, demand will outweigh supply.
Daniel Horowitz executive managing director, Studley
What is the most positive trend when it comes to working as a commercial broker in today’s market?
The tenants’ return to a more disciplined, rational approach to their commercial real estate strategy. Until recently, there was such a dearth of Class A office space available in Manhattan, in the midst of an overheated economy, that many companies were fearful that they wouldn’t have enough office space to support their growth. As a result, many tenants started to bank office space or lease excess space to secure it via direct leases and subleases. Time is now on the side of the tenant. With the large amount of space that has hit the market recently, tenants from those industry sectors that are continuing to grow or that have pent-up demand can now take an appropriate amount of time to do their due diligence and financial analysis to determine what type of deal will best support their short- and long-term business plans.
What is the most successful way brokers are adapting to the changed market?
Landlord agents who want to lease their buildings and maintain high occupancy rates have become more realistic about the market. During the first quarter of this year, there was a definite disconnect between the tenant representative’s perception of the market and the landlord representative’s perception. Today, that gap is significantly smaller, and landlord agents are acting accordingly, agreeing to flexible lease terms that enable transactions to close.
What do you expect to see happen in the near-term future when it comes to brokering in Manhattan?
As the deal flow continues to slow or remains as slow as it’s been throughout the second quarter and into the third, the playing field becomes increasingly competitive. More brokers are pursuing deals that are smaller than they are typically accustomed to. There will also be a thinning of the ranks.
Jeffrey Buslik director, Adams & Co. Real Estate
What is the most surprising trend when it comes to working as a commercial broker in today’s market?
People are really taking their time. They are looking, but they are also looking for an excuse for why they shouldn’t lease. Times are tougher, and tenants are taking time making decisions because they are being cautious.
What is the most negative trend?
Tenant perception that the sky is falling. They read that Citibank has several hundred thousand square feet on the market and they think they should be able to get a 30 percent discount, when in reality, for smaller tenants, the market is still tight.
What do you expect to see going forward when it comes to brokering in Manhattan?
It may be a little while until we get back to the best, but New York will stay a strong market for a long time. People want to be here, and the island is not getting any bigger.
Scott Panzer principal, Newmark Knight Frank
What is the most surprising trend when it comes to working as a commercial broker in today’s market?
How the hedge fund and private equity firms are still chasing the Holy Grail properties to lease, regardless of price.
What is the most negative trend when it comes to working as a broker in today’s market?
The sales brokers should probably take an 18-month vacation since there will be very few deals trading in their arena. Hospitality is the one exception.
What area of the commercial real estate market is it best to be working in right now?
Office leasing, with retail following, and then flex or industrial following behind that.
Is the number of people working in the field thinning, staying the same or growing?
The workforce is changing slightly as younger, less productive brokers are moving out of the sector and older, retirement-age brokers are asking themselves if now is the time to retire. Also, we are seeing a large shift in former corporates coming to the brokerage side of the business.
What’s the best piece of advice you’ve heard when it comes to dealing with down markets like the one now?
If you haven’t been working 100-hour weeks canvassing, sourcing, selling, servicing and following up, do it now before it’s too late.
What do you expect to see going forward when it comes to brokering in Manhattan?
Deals taking forever to close as landlords hold out for higher pricing and tenants wait for the market to drop.
Lori Shabtai director of luxury and brand retail, Winick Realty Group
What is the greatest misconception about being a broker in today’s market?
There’s a misconception that it’s an easy way to make money.
What’s the best piece of advice you’ve heard when it comes to dealing with markets like this one?
If you have a tenant, get leases signed immediately. This is not a market to wait around and see if there is a better deal that will come along. Today, if you have a good tenant and the financials work, get it signed because tenants can go away.
Aaron Jungreis president, Rosewood Realty Group
What is the most surprising trend you’ve seen as a commercial broker in today’s market?
The amount of cash buyers are willing to commit because they are not getting the financing they were before. They are getting about 20 percent less financing.
What area of commercial real estate is it best to be working in right now?
Retail and office sales.
What area is it worst to be working in right now?
Hotel or land development, although today, I have a signing of a contract land deal where the buyer is paying a healthy number.
Is the number of people working in the field thinning, staying the same or growing?
It’s definitely thinning. There is less
financing and fewer deals, so people aren’t hiring as much. Some people that have been doing sales for a couple years are leaving. The saying is that 10 percent of the brokers do 90 percent of the deals. I think 10 percent of the brokers do 95 percent of the deals. It’s very top heavy right now.
What’s the best piece of advice you’ve heard when it comes to dealing with today’s market?
Stay the course, keep going; it’s going to turn around. The market is tight now; it’s rough, but we’ll all get through it. It’s not as busy as last year, but I’m hoping a year from now, things will start changing.
What is the greatest misconception about being a broker in today’s market?
Definitely that there are no deals. There are still deals being done, but most deals are less than $100 million. The number of deals over $100 million are fewer and far between. The banks are still being aggressive on financing those smaller deals.
What do you expect to see going forward when it comes to brokering in Manhattan?
I think there’s going to be a gap between the seller’s price and the buyer’s. Sellers are not adjusting to the change in price from last year. There still needs to be a shakeout to get the sellers to lower their prices. Another cold winter of fuel bills will help that.
Cynthia Wasserberger managing director, Jones Lang LaSalle
What is the most negative trend when it comes to working as a broker in today’s market?
The turmoil in the financial industry has generated quite a bit of uncertainty throughout the New York office market. As a result, clients have become a bit more hesitant to make any decisions. Many are putting their real estate plans on hold for the short term unless they must make a decision due to a lease expiration, for example. Understandably, many clients are adopting a wait-and-see perspective over the next 12 to 18 months.
What area of the commercial real estate market is it best to be working in right now?
It may sound counterintuitive, but the
office leasing market is a great place to be right now. The volatility in the market has created many opportunities for space users that did not exist a year ago.
Is the number of people working in the field thinning, staying the same or growing?
The actual number of commercial brokers working in the Manhattan office market has remained about the same over the past year. What’s changed is that there has been consolidation among the real estate firms. So there are fewer brokerage companies, but about the same amount of brokers. For example, Jones Lang LaSalle just merged with the Staubach Company, so combined, we have a larger team.
What is the most successful way brokers are adapting to the changed market?
You cannot keep all of your eggs in one basket and expect to remain successful in this market. Brokers are representing clients involved in a variety of industries rather than specializing in companies doing business in one field. We are getting involved in different submarkets and a variety of building classes. There is a growing number of brokers becoming LEED accredited to tap a rising desire among our clients to make sustainable real estate decisions.
Any notable statistics or deals that illustrate what it’s like to be a broker in today’s market?
In the Midtown Class A submarket, there is nearly 3 million square feet of large blocks of high-quality office space that could be made available by tenants. There is another 4 million square feet of shadow space that may never officially be put on the market. This means that there are opportunities both for tenants looking for space and for brokers who can help clients dispose of excess space using creative exit strategies.