Burst of early renewals could hurt leasing in 2011

<i>December leasing was highest since July</i>

The high volume of leasing in recent months, fueled in part by tenants signing early renewals at sharply reduced prices, could come back to bite the market next year, some industry experts said.

Tenants with two and three years remaining on their leases — and sometimes even four years — are signing renewals early, said Bruce Mosler, CEO and co-chairman of commercial services firm Cushman & Wakefield.

“We are seeing, I think, a push to market … to take advantage of the capitulations in rents,” he said. “Which I think is creating demand in this market, and I think it will [reduce] demand in ’11 … unless we see some job growth again.”

However, some brokers did not expect the same elevated levels this year.

“I don’t think January will continue at the same level,” Howard Rosen, regional managing director at commercial firm Grubb & Ellis New York, said in an interview. “As far as I am concerned, the jury is out, and I don’t see job creation in Manhattan.”

The year-end surge capped a far more robust second half of 2009. The average monthly volume of new leasing doubled in the period between June and December, to 1.2 million square feet per month, from an average of 600,000 square feet per month from January to May, figures from commercial services firm CB Richard Ellis showed.

The volume of leasing for December, the most recent data available from CBRE, made it the best month since July, at 2.2 million square feet.

Tenants have been induced to sign by landlords paying for construction work, known as a work allowance, and providing months for free that in instances are equivalent to two and a half years of rent, Rosen said, a level he had not seen in nearly two decades.

Net effective rents for Class A buildings in Midtown, for example, dropped by 42 percent from the first quarter of 2008 to the fourth quarter of 2009, Cushman data showed.

“The market today is most similar to the early ’90s, in terms of low rent and high work allowance, and free rent,” Rosen said.

At the same time, the availability rate in Manhattan, which measures space that is vacant or will become available within 12 months, remained basically flat in December, CBRE data showed. However, in a sign of continued market weakness, the average asking rent fell by $0.16, to $49.01 per square foot.


Midtown closed 2009 with its strongest month of new leasing all year, reaching 1.6 million square feet, CBRE statistics showed.

Yet the activity has not given market watchers confidence that overall rents will increase in the coming months.

Newmark Knight Frank predicted the average asking rent in Midtown, which it recorded at about $52 in the fourth quarter of 2009, would remain flat in the first quarter of this year.

The firm also showed that in December, the Park Avenue area had the highest sublet availability rate of any submarket in Manhattan, at 7.4 percent, although at the same time it had one of the lowest direct availability rates, 7.1 percent.

Fueling the high sublet rate was a trio of buildings on the thoroughfare, including 277 Park Avenue, which has about 400,000 square feet of sublet space available, as well as 320 Park Avenue and 237 Park Avenue, CoStar Group data showed.

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While Midtown landlords have cut the asking prices of large blocks of space all year, CBRE predicted that wholesale discounting would stop in 2010.

Several brokers agreed, but with a caveat: that net effective rent would continue to fall.

Cynthia Wasserberger, managing director at Jones Lang LaSalle, said while average asking rents would likely remain flat, the net effective rent would decline moderately. “The trend line could be a little worse than in ’09,” she said, but added that some buildings would fare better than others.

Some select Park Avenue office towers may see increases in asking rents in early 2010.

Steven Morrows, senior vice president of leasing at RFR Realty, said it may hike asking rents at its Seagram Building at 375 Park Avenue and at Lever House, at 390 Park Avenue, because of strong demand. “We are asking $115 a foot. We have been at that range for several months… [But] we believe that in 2010 the rental rates may increase due to volume and velocity,” he said.

Several brokers noted that those buildings were a special case.

“Only at the very high end of the market at very select buildings have the rents stabilized or gone up,” Rosen said, citing Lever House, the Seagram Building, the General Motors Building and 450 Park Avenue.

Prices in such buildings were above $200 per foot during the boom, fell below $100 per foot, and now are back above $100, Rosen said.

Midtown South

Although Midtown South ended 2009 with its strongest month as well, the market had one of its weakest years since 1992, completing just 2.27 million square feet of new deals, the CBRE data revealed.

Tenants leased up 320,000 square feet in December, up 18 percent from the previous month and ahead of the district’s monthly average of 280,000 square feet, yet the average asking rent continued to fall, dropping $0.25 per square foot in December to $40.53, the figures showed.

The availability rate for the market stayed flat in December from the prior month, at 15.2 percent, which was the highest of the three markets and up from 11 percent a year ago, CBRE figures showed.

Pointing to continued softness, the “taking rent index,” which measures the actual rent as a percentage of the asking rent, fell to 80.7 percent, the weakest of the three markets, and the only one that has continued to decline in recent months, the CBRE figures showed.


Leasing activity Downtown did not show the same burst of activity seen in the other districts. The volume of new leasing fell in December from the prior month by 12 percent, to 280,000 square feet, and the average asking rent declined by $0.51 per foot to $38.12 per square foot, data from CBRE showed.

While the availability rate in December fell by .3 points to 11.5 percent, which was a positive sign for landlords, many market analysts believe vacancies will rise sharply this year as financial firms unload space.

In fact, a fourth-quarter report from Jones Lang LaSalle forecasted that the 10.9 percent vacancy rate Downtown, which measured space available now and within the next 12 months, could double over 2010.