The upcoming collapse facing commercial leasing — maybe

Some researchers say glut of rollovers looms; others beg to differ

Just as signs of a rebound start to emerge, researchers say New York’s commercial leasing market could be barreling toward a train wreck in 2013 and afterward.

Thousands of office leases will be rolling over in fits and starts over the next six years, experts say. That means that Manhattan’s commercial market may get worse — possibly a lot worse — before it gets better. That pricey 2006 lease, in other words, is going to look a lot different as a renewal in 2013.

Still, the scope of the problem is unclear. The CoStar Group declined to disclose the number of rollover leases, and major firms like CBRE and Cushman don’t track the number or keep it as proprietary information.

New York City, some experts say, has been protected somewhat from the commercial bust because longer leases are more the norm here than in other parts of the country. Leases elsewhere in the country average five years; in New York they are typically seven years, and up to 10, according to CoStar.

According to a Cushman & Wakefield leasing report, 2006 saw a flurry of leases signed, with 3,100, compared to 2,800 in 2007 and 1,900 in 2008. The average term length for leases signed in 2006 was 8.2 years; in 2007 it was 7.5 years; and in 2008 it was 7 years.

“It’s a big deal, and it is something we have to keep an eye on,” said Aaron Jodka, a senior real estate economist for CoStar, referring to the pending lease rollovers in New York City.

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Jodka and other analysts at CoStar say the glut of pending lease rollovers will be compounded by the steep drop in asking rents from the peak of the market. The overall average asking rent in July was down more than 40 percent since the first quarter of 2008, according to CBRE’s monthly market report.

As a result, tenants signing new leases during the downturn at lower rents create, on aggregate, reduced net operating incomes for landlords.

“In general, the distress we have seen (till now) has been a result of overleveraged owners that faced lease-up challenges. In the future, it is likely we will see distress emerge from the lagging effects of net operating income losses,” Jodka wrote in an e-mail.

But others — like Robert Sammons, director of research at Cassidy Turley — are skeptical. They argue that there’s no evidence of a concentration of expiring leases because a large number of existing leases have already been renegotiated as a result of the downturn. Furthermore, some say, economic variables, especially New York’s, are far too fluid to predict that far out.

“I swear I have heard this for the last two years, and I am just not buying it,” said Erik Schmall, executive managing director of Studley, who is skeptical of the doomsday scenario.
“The premise,” Schmall said, “is flawed.”

Recent market reports have shown encouraging, if mixed, signs of recovery. According to Cushman, office leasing volume in Manhattan topped 12.6 million square feet in the first half of the year compared to 6.4 million square feet leased by the same period last year. But average asking rents in the second quarter fell to $54.31 per square foot, off more than $5 from the same period last year.