How much further will the office market fall?

<i>Some brokers advise grabbing low-cost space; others say tenants can wait for more drops</i>

Major lease deals signed at the Boston Properties trophy office building at 399 Park Avenue over the past month seemed to indicate the market was getting a boost.

But the latest reports from the city’s commercial brokerage firms show continued slippage in Manhattan office leasing, and those mixed signals make it difficult for brokers to agree on what advice to give their clients.

Erik Schmall, a senior managing director at commercial firm Studley, said at the start of the crisis, his firm counseled tenants to hold off on making deals. But that stance has softened recently, and the company believes low-priced space can be had at attractive pricing.

“Whether we are at the bottom of the market or really close to it, we feel we are close enough where the quality of the deals we can get probably outweigh any possible further benefit,” he said.

But Marc Miller, executive vice president at leasing and managing firm Winoker Realty, said there is still time before tenants should feel pressure to sign leases. His company does not believe the market will begin to turn in the landlords’ favor until the fourth quarter of 2010 — at the earliest.

“We are saying there is no need to rush at this stage in the fourth quarter [of 2009], or necessarily into the first quarter [of 2010],” he said.

The fundamentals of the Manhattan office market continued to deteriorate in October, the most recent data from CB Richard Ellis revealed, but at a slower pace than during the first part of the year. While average asking rents continued to fall, landlords were not cutting prices on blocks of space at the same pace they were earlier in the year, the data showed.

Overall Manhattan average asking rents fell by $0.88 to $49.90 per square foot, while the availability rate, which measures space that is vacant or will be available within a year, rose by .3 points to 14.5 percent.

The continued mixed messages from the market made it difficult for landlords to price their space. But when space was considered well-priced, tenants jumped, brokers said.

Studley was one of the firms that recently took advantage of the down market by signing deals at 399 Park Avenue, between 53rd and 54th streets. It took about 60,000 square feet, while C.V. Starr took about 141,000 square feet and Avenue Capital leased some 57,000 square feet in the same building.

Schmall said basic economics dictated which landlords were filling their buildings.

Boston Properties “has met the appropriate price for the quality of product. So deals will flow that way naturally,” he said.

The firm FirstService Williams collected statistical evidence that landlords are no longer dropping prices as rapidly as they were earlier in the year.

The company measures the number of blocks of space priced higher and lower each month, as well as the spread between those numbers. That spread has narrowed nearly every month since reaching a peak earlier this year, when spaces with declining asking rents far outnumbered spaces with rising asking rents.

At the peak in February there were 514 blocks of space that had their prices cut, while 68 saw their prices increase, for a difference of 446. In October, the most recent data available, just 213 blocks had their prices cut, while 77 had prices rise, for a spread of 136, the lowest since September 2008, the figures showed.

“This might be some indication that asking rents are getting close to taking rents,” said Peter Kozel, senior managing director of research for FirstService Williams.

John Pavone, a vice president with tenant-side brokerage UGL Equis, said that from his experience and discussions with landlords, it seems the market boomlet over the past several months has slowed in recent weeks.

“There was a flurry of activity of people looking, but a lot of it has stopped,” he said.

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New leasing activity in Midtown fell for the third straight month after hitting its high for the year in July, CBRE data showed.

There were 910,000 square feet of new leases signed in October, less than half the 2.2 million square feet leased in July and about 27 percent off the average monthly leasing rate, the firm’s figures indicated.

The average asking rent for the district dropped by $0.99 to $56.98 per foot, driven in part by a steep drop in the asking rents in Sixth Avenue/Rockefeller Center submarket, where prices fell by $2.75 per square foot, the CBRE figures showed.

Availability in the district that has about 223 million square feet has zigzagged, over the year, reaching a peak of 15.4 percent in June, then declining for two months. In October, for the second month running, the rate increased.

Schmall recently ran a survey for a client and found some circumstantial evidence that more space was pouring on the market in Midtown. Normally he would get a few dozen possibilities for the requirement he had in Midtown. But he was stunned when the computer spit out more than 150 options.

“I can’t tell you I have ever had this many options in my 20-something-year career,” he said.

Midtown South

Average asking rents in the 64 million-square-foot district of Midtown South fell by $0.41 to $42.04 per foot, while the availability rate rose by .5 points to 15.3 percent. That was the first time since October 2008 that the rate in Midtown South was higher than the rate in Midtown.

To induce tenants to take space, landlords increased incentive packages. CBRE reported in its latest survey about one remarkable lease deal in which a landlord gave a concession that could be equal to nearly three years of free rent. The parties involved and the location were not named.

The lease provided for 15 months of free rent — the highest level in the district for at least a year. On top of that, the landlord gave $60 per square foot in tenant improvements. In a district where an average asking rent is about $42, that $60 is worth about a year and half of free rent.

The Hudson Square/Tribeca submarket located west of Sixth Avenue had the highest availability rate for all of Manhattan at 21.8 percent. That was driven up in part by the addition of 250,000 square feet of space at 445 Greenwich Street, according to CBRE statistics.


Leasing activity picked up in October from the anemic volume the month earlier yet remained far behind its monthly average, and as in Manhattan’s other markets, average asking rents continued to fall.

There were 250,000 square feet of new leases signed in October, up from 100,000 the month earlier, including a deal for 40,717 square feet at 7 World Trade Center taken by FX Direct Dealer, CBRE reported.

Richard Kennedy, Cushman & Wakefield senior director, who focuses on the Downtown market, said there was more activity in recent weeks compared with a few months back.

“There are some great deals to be had in the market. We are seeing more trading of paper — which are proposals — and we are seeing more tours. Those things are good and those lead to deals,” he said.

Despite that, the monthly volume in the 78 million-square-foot market lagged the five-year monthly leasing average by 38 percent.

The availability rate Downtown remained flat in October at 11.8 percent, the same as the prior month, while the average price per square foot fell by $0.27 per foot to $39.27 per square foot, the company reported.