Commercial lease forecasts depend on employment reports for accuracy, but job numbers may not keep pace with the rate of activity in an active market like New York City.
In fact, once state job statistics surface, any leasing activity that may be related to those numbers may have already occurred. For many large tenants, the unofficial motto is lease first, ask for workers later.
“In late 2004 and early 2005, companies were out leasing space because they felt like they would be hiring through the year,” said Robert Sammons, director of research at Colliers ABR. “They looked at the market and thought pricing would increase and went out there to lease space.” Efforts to fill that space with new hires came about six months later, says Sammons. Generally, once a firm secures space, additional hiring could occur immediately or within a year’s time, Sammons adds.
“Smart companies plan ahead and do the budgets and plan in line with space requirements,” said Daren Hornig, CEO of the Quest Group, which includes the Quest Commercial brokerage. “A big component in recruiting happens to be office space and location – do I get an office with a window, or a cubicle?”
In the period between November 2004 and November 2005, New York City (all five boroughs) added 36,300 private sector jobs, an increase of 1.2 percent, according to the New York state Department of Labor. With each employee accounting for somewhere between 200 to 250 square feet of office space – according to estimates from real estate industry professionals – a very simplified approach would suggest at first glance that anywhere from 7.26 million more square feet to more than 9 million square feet of space would need to be leased in the five boroughs to accommodate the hiring in that period.
But, of course, it’s not that simple.
Knowing how much empty space firms might already have on hand, gauging how busy construction and architectural firms who work with commercial space have been, and getting a sense of how many companies have packed employees in like sardines in the recent past can provide insight into future leasing activity.
As the economy began its recovery from the last recession, companies were extra cautious about spending. “I think companies packed as many people into existing space as they could,” said Craig Lemle, corporate managing director at Studley. “Even when they were making money and business was good, they still weren’t trusting it and that’s what kept the commercial real estate market kind of steady for the last few years. Then they got to the point where they had no choice.”
In some cases, layoffs or other corporate actions will free up space and companies will hold on to it, so even though space is open, since it’s not made available for sublease, it doesn’t end up in the vacancy rates.
“If a financial services firm decided they were going to lay off 1,000 people, you could assume they were going to be putting space on the market pretty soon, but they may not be,” Sammons said. “It’s what we call shadow space – tenants didn’t put it on the market and kept it – it wasn’t technically available. They didn’t feel they could get what they wanted for it and held on to it.”
Additionally, since many firms lease space before doing the hiring to fill it, it’s hard to say what set of employment data accounts for leasing activity and how expected future job growth will affect the commercial market. Another wild card is that it’s hard to say how a firm will use the space.
“There is no formula because different types of companies will allocate space in different ways,” Lemle said. “If you ask me how much space a law firm of 100 people will take I can give you an idea, but you can’t make a direct correlation.”
It looks different at the high end
According to Colliers ABR, from January 2005 to November 2005, 11.7 million square feet of space was absorbed in Manhattan alone, contributing to a drop in the overall vacancy rate to 8.9 percent, the lowest since the 8.8 percent vacancy rate in July 2001.
The outlook for leasing activity and rates, particularly in the best locations – space such as the General Motors Building or 9 West 57th Street – is bright for landlords, Lemle says. Many of the highest-end spaces in the best locations are commanding rents of more than $100 a square foot, he says.
“That end of the market is very much a landlord’s market,” Lemle said. “There’s a lot of job growth in financial services. Hedge funds and private equity firms want to be in the best space and they can pay the rent.”
The demand for what are considered the best spaces is so strong that it is forcing some firms, especially those that need large blocks of space in the hundreds of thousands of square feet, to make concessions, i.e. – find a class “A” type of space, brokers say, in a “B” location or the reverse.