As global chairman of CB Richard Ellis, Stephen Siegel is a big deal (maker) in commercial real estate. In a recent, very much to-the-point conversation with The Real Deal, Siegel drew on decades of experience to describe what makes the current commercial market at least in Midtown Manhattan one of the healthiest on record.
During the conversation in his Park Avenue office, he said inventory is being gobbled up in the New York market even as asking rents increase. Downtown could benefit from these dual developments: The tighter and the more expensive the inventory gets in Midtown and Midtown South, the likelier companies will be to look for space Downtown. Siegel also tackled the health of commercial markets in other cities as well as other topics. The conversation with Siegel is part of The Real Deal’s regular podcast series and can be heard in full here. Some excerpts:
THE REAL DEAL: What do you think right now is keeping companies from leasing Downtown?
STEPHEN SIEGEL: Well, I don’t think anything is keeping companies there is leasing going on Downtown. It has increased. I think if you look at the statistics Downtown, the vacancy rate went up from 12 percent to 16, not because there was a great decline on leasing, but because 7 World [Trade Center] went into the system. So I think that the leasing is occurring; the velocity is moderate to good, not phenomenal, but moderate to good.
TRD: If you could put a timeline on the recovery of Downtown, is it a question of years, or months?
SS: Downtown is on the precipice of booming. Two years from now, current pricing Downtown for investment and for leasing will be looked upon as a bargain that was lost.
TRD: What about Midtown? It’s a tightening inventory up there, rising asking rents what is the immediate future of Midtown and the long-term future?
SS: I think it’s very healthy. The leasing velocity is somewhat lower this year than it was in 2004. We had a leasing velocity in 2004 that eclipsed 2000, a year which I never thought would be repeated. It was pent-up demand, a result of the almost halting of leasing velocity in 2002 and 2003.
TRD: As far as the investment sales market in Manhattan, what do you think is happening right now, and what will happen?
SS: It continues to be red hot. There are significant bidders for every single asset. Relatively speaking, there are few office assets that have come to market, if you compare it to the amount of residential buildings that have gone on the market. 230 Park Avenue went into contract last week [Nov. 10] at $700 million plus, and that was bought by the investment arm of the royal family of Dubai. It just continues to be a very heated marketplace, lots of capital available, and this marketplace has great appeal both to local investors and offshore investors.
TRD: Do you think prices will ever go down?
SS: I could never say prices will never go down. My sense is that pricing, while at levels that people probably never imagined, is probably at levels justifiable. There’s declining availability in Midtown in particular, and there’s the rising rents, which I believe will continue to rise significantly over the next couple of years.
TRD: What about new commercial office development?
SS: There is very little product that can really be delivered. If you take Midtown from east to west, there’s very few sites where any significant development can occur. The next real development is going to occur west of Penn Station there’s maybe one more site on 42nd Street, Sheldon Solow has a site over on First Avenue, on the East Side. But there’s very little, and the only way anyone’s going to deliver a development of any consequence is with a pre-leased component of substance. So from a supply a new supply perspective barring another sublet dump, which is not in the foreseeable future, I think rents are going to rise dramatically over the next 24 months.
TRD: Let’s move beyond New York City for a bit. What is your feeling about the general commercial market nationwide?
SS: It varies from place to place, but on an overall basis it’s picked up slowly but steadily in the last 12 to 24 months. Boston is doing quite well; Washington, DC, is booming. Other markets are considerably hit-and-miss, like Chicago, Philadelphia and Dallas.