More office market woes

<i>'Effective rent,' key market indicator, falls in Midtown after late 2009 rise</i>

Last month, one of the market’s most reliable indicators showed that Midtown landlords are still suffering — even as brokers claimed the period of steep rent declines in Manhattan was over.

The effective rent — a closely guarded slice of data that measures how much office leases are worth when free rent and other landlord concessions are factored in — fell in the first three months of the year in Midtown’s Class A buildings, after rising over the fourth quarter of 2009.

Many brokers saw the decline in effective rents as the last gasp of the recession, but others said prices might fall for the foreseeable future.

Dan Gronich, a vice chairman at Grubb & Ellis New York, predicted that effective rents will trend down over the next few quarters and remain flat for as many as three years.

“If the landlord tries to push the effective rents up a little, the tenant backs off. Right now the tenant has the edge,” Gronich said. But he noted the atmosphere is not as uncertain as it was a year ago. “No one has the same kind of fear mentality. So the landlord can say, ‘I will be generous [but] not give away the whole ship.'”

Effective rents in Midtown’s Class A buildings slipped by 9 percent to $46.85 in the first quarter after nudging up in the prior quarter by nearly $3 per foot, a report from Cushman & Wakefield showed. Effective rent is down 47 percent from the market peak of $88.79 per foot in the first quarter of 2008, the report said.

Despite the sharp decrease in effective rents since 2008, brokers are not seeing significant new demand from firms outside the city moving to Manhattan to take advantage of the depressed rents.

“There is an enormous cost to move a corporation,” said Andrew Simon, executive managing director at NAI Global New York. “It is a big undertaking, and rent is only one component.” Other brokers noted that rents are not only down in Manhattan, but also nationally.

In contrast, the Cushman report predicted that effective rents in Class A properties would increase this year to an average of $54.65 per square foot and would rise by about $5 per square foot over the next four years before jumping by nearly $11 per foot in 2015 to $85.25 per foot.

The effective rent index is closely watched because it tracks actual deal pricing, as opposed to asking rents, which reflect advertised prices. But commercial firms release only a limited amount of this data.

The effective rent is also a leading indicator for office pricing, Cushman data showed. For example, the effective rents for Class A Midtown buildings began their decline in the second quarter of 2008 — two quarters before a decline in asking rents was recorded.

In March, the most recent data available, overall asking rents for Manhattan fell by $0.51 per square foot to $48.27 per square foot, off $9.08 per foot from March 2009, when they were $57.35 per square foot, figures from CB Richard Ellis showed.

As prices have fallen to a level most consider near the bottom, leasing volume has improved.

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New leasing activity increased in March from the prior month, reaching 1.7 million square feet, a jump of 250,000 square feet from February, CBRE data showed. The availability rate remained flat in Manhattan last month at 14.3 percent, but still higher than March 2009, when it was 13.1 percent.


Average asking rents in Midtown declined by $0.31 per square foot to $55.44 per foot. Leasing volume, meanwhile, matched the five-year monthly average of 1.2 million square feet — a steep increase from February, when just 860,000 square feet was leased.

The availability rate, which measures space that is vacant or available within 12 months, declined by a modest .2 points to 14.6 percent, CBRE figures showed.

However, the two submarkets that had the highest availability rates in Midtown one year ago — both over 17.5 percent — have seen their rates fall dramatically over the past 12 months. In the Plaza District, the availability rate declined last month by 2.2 points to 13.6 percent, and on the East Side, the availability rate hovered at slightly over 12 percent, after falling by more than half a point.

“These are the better assets in the prime location. With the pricing coming down, it is attracting the tenants that otherwise were priced out of the market,” said Joel Weinberg, associate vice president at UGL Equis, a tenant advisory firm.

Midtown South

Following two months of increases in asking rents in Midtown South, prices declined slightly in March while the volume of leasing slipped as well.

Asking rents fell by $0.11 per foot to $41.60 per square foot, after rising by $1.14 per foot over the previous two months, CBRE data showed. The leasing volume, which in February was 410,000 square feet, returned to a more traditional pace at 270,000 square feet, the company statistics showed.

The availability rate was 14.4 percent, off .6 point from February, and the lowest level since August 2009 when it was 14.3 percent.


The financial services industry continued to return unneeded space to the market, driving the availability rate Downtown higher in March.

In March, 513,000 square feet of insurance company AIG’s space at 70 Pine Street was returned to the market, in anticipation of the company moving to 180 Maiden Lane. That came a month after 733,000 square feet occupied by investment bank Goldman Sachs was listed as available in February. Both moves were long-expected, but the impact on the availability rate has been sharp, jumping from 11.5 percent in January to 13.5 percent in March, CBRE statistics showed.

Leasing activity, meanwhile, remained sluggish. There was 260,000 square feet of space leased in March — nearly a third below the five-year average of 360,000 square feet. And average asking rent declined slightly.

But the Downtown market got some positive news last month with word that accounting firm Deloitte is staying in Brookfield Properties’ World Financial Center (although according to news reports, it will occupy a smaller footprint of about 600,000 square feet).

“It is great for Brookfield. [But] some buildings that would have liked to get them, like Worldwide Plaza, might feel the loss,” Gronich said. “On the other hand, because Worldwide Plaza was bought at a very low rate, ultimately [the buyer George Comfort & Sons] should come out just fine.”