Recent bad news for Wall Street may mean good news for Manhattan’s congested office markets. By late December, the major financial houses had lost more than $40 billion related to the subprime mortgage crisis, which may force tens of thousands of people out of work in Midtown and Lower Manhattan.
The possible resulting layoffs have led brokers to believe that Wall Street firms will try to sublease some of their unused trading floors.
New office inventory couldn’t come at a better time for the Manhattan market. According to a report by Cushman & Wakefield, asking rents in Manhattan hit $62.91 in the third quarter, representing a new record. The jump of 37.2 percent from the year-ago quarter was the biggest annual increase ever recorded.
While average rents are up compared to a year ago, the pace of increases began to fall sharply in the late summer, after the full scope of the subprime crisis began to unfold.
Through the first seven months of 2007, rent grew by an average of $1.88 per month. However, by August and September, monthly rent increases averaged only 59 cents.
“As of now, nothing’s changed,” said Paul Bostick, president of Bostick Realty. “Prices have stopped spiraling up as fast as they were, but we’re waiting for the other shoe to drop.”
A separate report from Colliers ABR showed overall asking rent in Manhattan rose just 0.2 percent in November.
As banking space comes on the market, brokers warn that final decisions on pricing and the amount of inventory that enter the market will take months.
“We all believe there are going to be changes and additional space brought to the market,” said Bob Stella, principal of Cresa Partners. “However, these decisions are not made overnight.”
Citigroup, which announced plans to cut 17,000 jobs worldwide in April 2007, has already begun shedding real estate assets through the $1.57 billion sale and leaseback of its 2.6 million-square-foot Tribeca office building at 388 Greenwich to SL Green Realty Corp. and Canada’s SITQ.
The bank has also decided to give up the third floor at 666 Fifth Avenue when its lease expires in August 2008. The bank leases about 355,000 square feet in the 41-story office tower. Tishman Speyer sold the 1.55 million-square-foot building to Kushner Cos. a year ago for a record $1.8 billion, the biggest price ever paid for a single building in the U.S.
Citigroup officials were said to be considering up to 28,000 additional job cuts related to the subprime crisis. However, the bank, which wrote down $11 billion in subprime-related securities, called those reports “speculative” and declined comment on whether it planned to sublease any of its New York office space.
Other firms may be reconsidering deals already on the table. Merrill Lynch, which took a $7.9 billion write-down against mortgage-backed securities in the third quarter, had been in talks to move its headquarters to the former Hotel Pennsylvania, across the street from Penn Station.
“All of a sudden, they were crushed with additional losses,” said Stella. “Now, no one knows what’s going to happen.”
The move to relocate its headquarters would reportedly cost Merrill Lynch about $1 billion. The investment bank has also been offered a five-year lease extension at the firm’s existing 3-million-square-foot site at the World Financial Center, which would keep Merrill in Lower Manhattan through 2018.
The subprime meltdown has affected several other Wall Street banks, including Bear Stearns, Morgan Stanley and others. However, it is not immediately clear what impact subprime-related write-downs will have on their real estate portfolios.
“We have yet to see the full impact of this debacle on the marketplace,” said Leon Manoff, executive managing director at GVA Williams, a commercial real estate brokerage in New York. “The next 30 to 45 days will begin to answer this issue.”
Subleasing space has several advantages for the sublessor and tenant, although there are potential risks as well. A sublease offers ready-made office space at a discounted rate, making it a good choice for companies looking to quickly unload office space.
However, if there is the potential for a market turnaround, a lessor may have to find new space at a higher price per square foot in another location.
As a result, companies will not put office space on the market without careful consideration of their future growth strategies.
Grant Greenspan, principal at the Kaufman Organization, said that in a tight market for commercial office space, some sublessors may be willing to discount monthly rents and fill the space quickly, while others will choose to keep the space open until the market recovers.
“Find the owners that are willing to break price and try to identify them as quickly as possible, because the market is very tight for space,” Greenspan said.
A major round of layoffs will not only affect commercial space at the major investment banks, but a host of businesses that depend on Wall Street firms, including law firms, accounting firms, consultancies and other related businesses.
In addition, companies with no direct link to the investment banking industry may add to the mix. Pharmaceutical giant Bristol-Myers Squibb said last month that it will cut 10 percent of its global workforce and vacate three of four floors at its 345 Park Avenue headquarters.
The company leases 375,000 square feet at the building and sublets another 215,000 square feet to other tenants. A company spokesperson said that Bristol-Myers has not determined when it will give up the space or whether it will attempt a sublease.