The credit crunch has yet to rear its ugly head in Manhattan’s commercial market, at least according to some real estate market watchdogs and data from CB Richard Ellis.
“We’re not seeing it on the street,” said Gerry Miovski, a senior vice president in the Downtown office at CBRE. “People are talking about it, but it is not manifesting itself.”
Jonathan Mechanic, partner and chairman of the real estate department at law firm Fried, Frank, Harris, Shriver & Jacobson, said he has seen little effect.
“I imagine it has tempered a little bit, but I’m still signing transactions and doing some leases for space for people who need space immediately,” Mechanic said. At the same time, he said, businesses “may scale back what their expectations are about how quickly they will expand.”
Some real estate firms have recalibrated expectations for rent growth, which had been great, due in large part to limited inventory.
Still, while the country copes with the fallout from the mortgage crisis, Manhattan brokers say the borough’s real estate market has only been touched lightly by the meltdown.
“We expect the rental growth rate to flatten right now,” said David Green, an executive director in the Midtown office of Cushman & Wakefield. Viewing the mortgage crisis as “a temporary blip,” the company is altering its short-term growth estimates but not its long-term ones.
The data bears this out so far.
There was a marginal increase in Manhattan’s average asking rent to $64.39 per square foot in August from $64.02 a square foot in July, according to the most recent data available from CBRE at press time.
Robert Sammons, director of research at Colliers ABR, said he expects only a slight uptick in vacancy to accompany flattening rents by the end of the fourth quarter.
The vacancy rate remained flat at 4.4 percent from July to August. At the same time, however, Manhattan leasing activity increased to 2.29 million square feet in August from 1.53 million square feet in July.
Talk about a significant number of layoffs has people concerned about a lot of office space freeing up, but a low vacancy rate plus a dearth of office developments coming online would help to offset the losses.
Cushman & Wakefield’s Green said that Manhattan would be able to absorb the space that would become available if as many as 50,000 people lost office jobs.
It is not necessarily the case that layoffs would result in a surge in inventory anyway because big companies may opt to “keep the space and wait it out during the down market,” said Sammons.
While the credit crunch has scared off some businesses and frustrated landlords looking to substantially raise rents, a drop in rental activity benefits tenants who still want to lease space, brokers said.
“If there is lower transaction velocity, there will be some landlords that will say, let’s reach a little to make a deal,” said William Montana, a managing director at Studley.
Montana negotiated space in a Class A Midtown building for a trading company last month. He persuaded the landlord to pay for the full build-out of the space.
“I said, ‘Perhaps this fear could be an opportunity. Let’s go back and ask the landlord to construct the space for us,’ and he said he would. That’s not something I think we would have seen two months ago,” Montana said last month.
Midtown
Following the eruption of the credit crisis, Midtown was not in bad shape.
The average asking rent in Midtown remained flat at $81.34 per square foot in August from $81.35 a square foot in July, the most recent CBRE data indicates. That was the first time in 14 months that rents did not rise. The August average was up, however, from June’s $79.85 a square foot and August 2006’s $60.34 per square foot.
Between the start of September 2006 and September 2007, rents jumped 34 percent, CBRE research shows.
Leasing activity increased to 1.26 million square feet in August from 910,000 square feet a month earlier. There was a significant dip in activity from last August, however, when 1.65 million square feet traded hands.
Space availability — which includes present-day vacancy plus space to become available in the next 12 months — dropped to 7.1 percent in August from 7.3 percent in July, a rate not seen since before Sept. 11, 2001. August 2006 availability was 8.2 percent.
Midtown South
As in Midtown, the Midtown South market fared well following the tightening of the credit markets.
Average asking rent in Midtown South was on an upward trajectory between June and July, and continued up in August, albeit less than $1.
Rents rose to $47.42 per square foot in August from $46.84 in July. The average August rent jumped $10.55 from last August, when the average asking rent in Midtown South was $36.87 a foot, CBRE data indicates.
Commercial space is tight in Midtown, boding well for Midtown South and Downtown, which benefit from the overspill in Midtown.
August leasing activity was up to 580,000 square feet from 350,000 square feet in July, but down significantly from 1.65 million in August 2006.
Downtown
The Downtown commercial market saw vacancy drop after the eruption of the credit crisis.
Space availability in August was at its lowest rate since before the Sept. 11 attacks, CBRE research showed, at 8.8 percent. July and June were at 9.2 percent; August 2006 was at 11.5 percent. Of the three markets — Midtown, Midtown South and Downtown — Downtown saw the greatest drop in available space between August 2006 and August 2007.
There was a flurry of leasing activity Downtown, with 440,000 square feet spoken for in August compared to 270,000 the month before, the CBRE data shows.
Both months combined, however, did not come close to matching the amount of space leased in August 2006 alone, which was 1.04 million square feet.
Rents rose 40 cents between July and August to $46.37, CBRE data shows, but dipped 42 cents from June’s $46.79.