It is hard for this pessimist to report that it looks like the stars in the galaxy seem aligned for better times ahead in the New York City office market.
You don’t have to take my word for it — a number of leading experts on the city’s office market are lining up to testify to the market’s improving health.
After more than two years of being one of the most bearish real estate leaders, Barry Gosin, CEO at Newmark Knight Frank, told the November meeting of the Association of Real Estate Women that “the office market has rebounded in New York City.”
Even Gosin’s partner Jim Kuhn, Newmark’s president, who has been quite negative, was singing a different tune in October at the New York Real Estate Summit. “The office market is getting better in New York. Strong landlords and quality tenants will gain traction in the market,” he said.
Glenn Markman, executive vice president at Cushman & Wakefield, said he believes “the office market has velocity once again.
“Each tenant with proper representation should be able to position themselves in a very positive way. I mean a long-term, low-cost lease that will position the tenant for the next 10 to 20 years,” Markman said.
David Falk, president of the tri-state region and a principal at Newmark Knight Frank, said tenants are seeking opportunities and looking at reduced rentals via subleases.
“They’re looking at space that has been on the market for an extended time,” he said.
Working in tenants’ favor is the change in the net effective rent for space. The net effective rent represents the actual rent a tenant pays for space after taking into consideration concessions for free rent and leasehold improvements. According to Joseph Harbert, COO of the New York Metro Region at Cushman & Wakefield, “while asking rents are down 20.2 percent, the net effective rents are down by 44.9 percent.”
This means tenants have the best chance of the last quarter-century, said David Arena, president of Grubb & Ellis New York. “For service firms like ours, today is an opportunity to rent space at an exceptionally low cost, without major capital contribution, and lock oneself in a very long time. Firms are [moving] from Class B space to far better.”
And, in another shift, tenants are scrutinizing the financial stability of a landlord now more than in the past few years. A landlord who acquired an office building during the height of the sales market in 2006 and 2007, who is undercapitalized and having difficulty meeting mortgage payments, will be unable to secure a new tenant for an office space. Leasing brokers want to make certain their commissions will get paid and tenant improvements can be completed.
It is hard to imagine that a tenant can secure an office lease on Park Avenue at nearly a 50 percent discount from the peak of the market in 2007, but that is now the case for many properties on this fashionable avenue (see “After hiatus, some retailers shop for flagships”). Tenants can lease renovated office space for a term of up to 11 years on a sublease at 277 Park Avenue. According to brokers, the effective net rent is in the range of $50 to $60 per square foot.
It took less than one year for Boston Properties to lease out most of the former space of Lehman Brothers at its Class A office tower at 399 Park Avenue. Tenants were able to secure space on the lower floors for as low as $50 per square foot, and higher floors rented for close to $70 per square foot.
Rents on Third Avenue in the Grand Central marketplace are at bargain-basement prices, too. Later this month, a financial service firm is expected to sign a lease for approximately 45,000 square feet in the Chrysler Center at 666 Third Avenue. The space is totally renovated, with finishes that cost the landlord and tenant in excess of $100 per square foot. Even the workstations, telephones, conference room table and chairs, marble floors and blinds are included in the lease. The tenant will be able to secure the space on a long-term sublease of seven years for a price of $40 per square foot. Throw in six months’ free rent and the effective rent is reduced to less than $35 per square foot.
Bargain shoppers have the best opportunities for space in Lower Manhattan, Downtown Brooklyn and Long Island City. Over 7 million square feet of space will be available in Lower Manhattan when Goldman Sachs relocates, coupled with the consolidation of space by AIG, Bank of America and Merrill Lynch.
Tenants might be able to secure space in Class B office buildings for effective rents as low as $25 per square foot. In Downtown Brooklyn, Long Island City and the Bronx, in addition to rents for as low as $25 to $30 per square foot, tenants have the opportunity for additional savings afforded by the Relocation and Employment Assistance Program.
It seems that New York City will unwrap a big holiday present: the opportunity to lease in the best city in the world. There has never been a better time.