How stable is the office market?
September, 01, 2007
The market for high-end Manhattan office space tightened over the summer as Midtown rents reached record levels.
Then shockwaves from the national mortgage meltdown rippled through the market, curbing enthusiasm and leaving commercial market watchdogs wondering about the extent of the fallout.
"Everyone on both sides wants to play this out and see where the market is going," said Benjamin Friedland, a senior vice president in the Midtown office of CB Richard Ellis.
It is too early to gauge the long-term effects this month, but some real estate pros are taking a longer view, speculating that next year some businesses could go belly up, making more space available for survivors and eventually bringing down asking rents.
With few new office developments coming online -- CBRE's data indicates only a few commercial buildings will rise in Midtown over the next few years -- the instability in the credit market could be a boon for those that can stay afloat.
"In the next six to nine months, because of the credit issues that are being widely reported right now, the fallout from this will be very significant, with companies going under and their space coming back on the market," said Travis Yuengst, head of CBRE's research department.
Cracks in the market could already be appearing. Late last month, in one deal, Lehman Brothers declined to take another 70,000 to 80,000 square feet at 399 Park Avenue, according to a Crain's report, in what could be a sign of things to come.
Mortgage troubles and their fallout followed a hot summer in which the average asking rent in Midtown soared to $81.35 a square foot in July, the most recent data available, according to CBRE. The average asking Manhattan rent increased to $64.02 per square foot, only 46 cents more than the previous month's $63.56, but a significant $15.99 higher than July 2006's average rent of $48.03.
Leasing activity, however, slipped in July to 1.53 million square feet from 1.81 million square feet in June and 2.94 million in July 2006. It was still a busy month. The vacancy rate in Manhattan was 4.4 percent in July, unchanged from the month before, and down considerably from July 2006 when it was 6.2 percent.
"People feel with the recent credit issues, bargains may materialize over the next six to nine months," Friedland said (see Hunting for office bargains).
Market watchdogs forecast that rents will continue to go up in Manhattan, just not at the pace already seen.
Midtown
Rents have been ticking up incrementally in Midtown since December 2006, when the Midtown market surpassed the $66-a-square-foot record from 2000, Yuengst said.
July's average rent reached a record $81.35, up only $1.50 from the month before, but up $22.20 from July 2006's average rent of $59.15 -- a 38 percent rise.
"On a percentage basis, this is a huge jump," Friedland said.
Yuengst noted that, "a lot of the owners are repricing their existing space a couple of bucks a foot here or there. There are even some buildings that are vacant with no activity, and then they raise the rents."
Yet the Midtown vacancy rate changed little -- rising slightly to 4.0 percent from 3.9 percent in June, but down from 4.5 percent in July 2006.
Midtown leasing activity dropped to 910,000 square feet in July from 1.25 million in June and from 1.86 million in July 2006, according to CBRE figures.
There is little inventory for companies seeking space.
"There's a scarcity of development." Yuengst said. "We need more. In the next three years, Midtown will only have three buildings come online."
Midtown South
Little changed in Midtown South between June and July, but the area saw significant gains from a year ago.
The average asking rent increased to $46.84 in July from $45.79 in June, CBRE data shows. Leasing activity was 350,000 square feet in July, up from 310,000 the previous month. And vacancy stayed flat at 3.9 percent.
More significantly for Midtown South, from July 2006 to July 2007 the asking rent was up more than $10 a square foot from the July 2006 figure of $36.57. The vacancy rate was down 1.7 percent from the year-earlier figure of 5.6 percent.
Downtown
Businesses were increasingly attracted to the Downtown market in July, where rents were comparable to those in Midtown South.
The average asking rent Downtown was $45.97, CBRE data shows, a 19 percent increase from $38.57 the July before.
Downtown's average rent was 43 percent less than Midtown's, and more and more Midtown companies are capitalizing on the good deals Downtown.
"It's definitely picked up [recently]," said Kenneth McCarthy, Cushman & Wakefield's managing director of research for the New York area. "There has been movement."
In the last 12 months, 30 Midtown tenants migrated below Canal Street, McCarthy said. Over the 12 months prior, another 30 moved Downtown. The year before that, August 2004 to August 2005, there were 20.
But a dearth of space is expected to last until the myriad projects Downtown come online, brokers said.