Michael Stoler — Big changes since AIG, Bear Stearns

In the boom years of 2006 to 2007, investment bankers and financial services firms were making the big bucks. Any way you look at it, the numbers were fat, with big bonuses, high expense accounts and very high rents for office space, especially in Class A office buildings in the Plaza District. But that was then and this is now, and the disparity between the two inspired me to add some new lyrics to the song “Those Were the Days.”

Once upon a time in Manhattan

Tenants would pay very high office rents

Landlords expected prices to

continue rising

And dreamed that this would never end

Those were the days, my friend

We thought they’d never end

We’d sing and dance forever and a day

We’d live the life we choose

We’d fight and never lose

For we were young and sure to have our way
La la la la …

Those were the days, oh, yes, those

were the days

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Oh, yes, those were the days, when $150 per square foot was commonplace in Plaza District office buildings. Unfortunately, as James Kuhn, president of Newmark Knight Frank, points out, “It’s going to be a long time before we see $100 rents.”

Forget the hedge funds, investment banks and financial services firms paying these rents. Companies like Lehman Brothers, Bear Stearns, AIG and Wachovia are no longer willing or able to pay these rents. Many of these firms no longer exist, having become the dinosaurs of the 21st century. “The entire investment banking industry has gone away,” said Bruce Mosler, president and CEO of Cushman & Wakefield.

This year, tenants are taking their sweet time to enter new leases and are seeking rents that Manhattan has not seen in five to seven years. “We are at the 2003-04 price levels for office space,” Kuhn said. “The landlords are not willing to accept pricing for rents.

“We are in a period like the cycle between 1974 and 1991. It took years to return to higher rents. Perhaps we may bottom out by the end of this year,” Kuhn said.

Tenants truly have the upper hand in lease renewal and negotiations. In today’s market, the difference between “bid and ask” for rents continues to be in the range of 30 to 50 percent. As a result, many tenants are able to negotiate short-term subleases while many landlords are happy to renew leases with current tenants at lower-than-expected rents, just to keep their buildings occupied.

Stephen Siegel, chairman of global brokerage at CB Richard Ellis, said: “I expect to one day see $100 rents, but it is going to take a long time to see rents go to that level.”

(Kuhn quipped that we can “expect to see $100 oil prices before we see $100 for rents.”)

According to Siegel, a major tenant lease was set to expire in 2013, and the tenant met with his landlord to discuss a renewal. To keep the tenant, the landlord provided his credit-worthy tenant a new lease for half the rent the tenant would have paid less than a year ago.

Another client of Siegel’s was paying less than $110 per foot for space and was planning to move to Lower Manhattan at a significantly lower rent. To keep the tenant in his current space in Midtown, the landlord reduced the rent to $60 per square foot.

As noted in the JPMorgan North American Equity Research report, for Vornado Realty Trust, one of the largest owners of office space in New York City, lease lengths were shorter than normal, with an average term of 5.6 years in the first quarter of 2009, compared to 8.6 years in the fourth quarter of 2008 and 9.1 years for the full-year 2008.

“Clearly, leasing markets were frozen in the first quarter,” the report stated. “Tenants were not anxious to make decisions, and those that did sign leases did not want to make as long of a commitment as they normally would make.”

During a conference call with investors, Doug Linde, president of Boston Properties, said:”Now we may or may not have reached the floor, but because rents grew so quickly in such a relatively short period of time, current rental levels are not nearly as depressed as what the market may actually perceive. When we calculated our marked-to-market this quarter, we did have a better picture on the current level of rents in New York City, since we’re in the midst of a number of live transactions. On average we brought down our rents by about 14 percent, although our rents were somewhat conservative from that point. Since the middle of 2008 we’ve reduced our gross rents for purposes of calculating our marked-to-market by about 35 percent in New York City.”

Linde also sees rents struggling to reach $100 levels.

“We signed a lease at Citigroup Center at $140 per square foot in November 2008, and I don’t think we would be able to get a $90-per-square-foot rental today. That does not mean we won’t get $80 to $85 per square foot, but I think rents with a starting rate with a ‘9′ in front of them would be a real challenge and probably not achievable.”

One thing is certain: It’s going to be a tough year ahead for the New York City office market. Once underdogs, tenants are now in the driver’s seat. Nevertheless, remember New York City has rebounded in the past and it will rebound again.