12/02/08

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Office tenants waiting for market to bottom

Despite a slowdown in leasing and an increase in vacancy in Manhattan's office market, asking rents continued to increase in April, according to data from Colliers ABR. But a quick look at the deals around town reveals that net effective taking rents are on their way down.

The average asking rent in Manhattan continues to rise, up over $1 to $66.42 per square foot, from $65.38 per square foot in March, and $56.63 per square foot one year earlier, the Colliers report said.

Brokers agree that the rise in asking rents belies a decrease in net effective rents after accounting for concessions in lease agreements that cut costs to tenants. Building allowances have increased in the market, brokers said, as have the frequency of complete build-outs provided by landlords.

In a typical market, building allowance provided for a Manhattan tenant averages between $35 and $45 per square foot, said Marc Shapses, executive managing director at Studley. By contrast, prebuilt, or turn-key space — which is coming on the market more frequently in recent months — has a value of between $65 and $90 per square foot to the tenant.

Shapses pointed to 14 Wall Street, recently renovated by Capstone for turn-key leases, as a good example of a landlord finishing a property to entice prospective tenants.

He said that turn-key space is usually done with smaller spaces, and oftentimes a landlord will cut up a mid-size space when prebuilding. For example, a 40,000-square-foot raw space may be divided into several 5,000- to 20,000-square-foot turn-key offices.

Leasing activity fell to 1.46 million square feet in April, down from 1.52 million square feet in March, according to a monthly report from CB Richard Ellis.

As more and more tenants realize that the market is beginning to slide, they are becoming hesitant to sign deals, according to David Menaged, an associate director at Adams & Co. Leasing activity suffers as a result.

"[Tenants] are trying to time it right with the bottom," Menaged said. "They don't want to sign something now if they're going to end up kicking themselves in the head when there is a 10 percent discount 90 days from now."

Vacancy rates could increase in the market until as late as the end of 2009, according to Cynthia Wasserberger, senior vice president at Jones Lang LaSalle. Researchers there predict vacancy will top out around 9.5 percent next year. This is based on a 7.7 percent vacancy rate the brokerage reported in the first quarter of 2008.

Manhattan's vacancy rate was up 50 basis points to 8.3 percent in April, compared to March, and up 1.2 percent from 7.1 percent in April 2007, according to the Colliers monthly report.

Midtown

Midtown's vacancy rate crept up to 7.6 percent in April 2008, up 50 basis points from 7.1 percent in March, and up from 6.4 percent in April 2007, Colliers reported.

Menaged of Adams & Co. said that the Plaza District, which saw the most rampant rent growth in the last year and a half, will experience the most severe adjustment accordingly.

"Rents [in the Plaza District] skyrocketed over this last period of growth, from $50 or $60 per square foot to as high as $150 in some places … those increases were huge," he said. "Those areas that had the largest price jump in the past year are going to be the softest part of the market [in the down cycle]."

Alternatively, Menaged believes "specialty" spaces, which don't show much flux up or down in a cycle, will fare the best in coming months. A property he is brokering at 34 West 33rd Street caters specifically to the children's clothing industry, and the 185,000-square-foot building is 100 percent occupied by around 30 tenants.

"A specialty building does not really get hurt as bad," he said. "They also didn't get the huge steepness in rent growth when it was there."

Asking rents in Midtown were up $1 to $80.85 per square foot, from $79.85 per square foot in March, and $69.43 per square foot in April 2007, according to Colliers' report.

The market's leasing activity stayed even at 1.13 million square feet from March to April, CBRE reported.

Midtown South

The vacancy rate in Midtown South's office market remained at 10.2 percent in March and April, Colliers reported. It was up 2.7 percent from 7.5 percent in April 2007.

The market's average asking rent rose 62 cents to $49.58 per square foot in April, from $48.96 per square foot in March, the report said. Average asking rent in Midtown South was $42.55 per square foot in April 2007.

Leasing activity was down 8.7 percent to 210,000 square feet in April compared to the previous month, CBRE reported. Midtown South's leasing activity was 230,000 square feet in March.

Downtown

The Downtown market saw a 1.1 percent jump in vacancy rate to 8.1 percent in April, compared to the previous month. The vacancy rate remains down from 8.6 percent in April 2007.

Despite the increase in space on the market, average asking rents Downtown were up $1.79 to $51.38 per square foot in April, from $49.59 per square foot in March. In April 2007, the average asking rent was $43.47.

The market's leasing activity dropped 25 percent to 120,000 square feet in April, according to CBRE. There were 160,000 square feet leased in March.