11/21/08

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Wall Street hires bode well for leasing

Wall Street has always been more than a street name in Manhattan's commercial real estate lexicon it's Downtown's surest source of large leases.

Financial institutions lease about 330 of the Manhattan offices with more than 25,000 square feet, according to commercial information provider Costar, and make up 5 percent of the overall market. A hefty chunk, though that's started to lessen to a degree.

"Obviously, the big gorilla in the room is the big financial services firms in New York City, though that's kind of broadened in the past couple of years," said Robert Sammons, director of research at Colliers ABR.

Of the seven largest lessees of office space in Manhattan, all of which lease more than 2 million square feet of space, six are financial services firms. The other is the City of New York.

Those six behemoths Citigroup, JP Morgan Chase & Co., Credit Suisse First Boston, Bank of New York Co., Morgan Stanley and Merrill Lynch & Co. currently lease about 18.5 million square feet of office space.

Most of them lease Class A space in larger buildings, and thus account for 8 percent of the Class A market in Manhattan, which totals about 233 million square feet.

When they experience a cyclical upturn, financial services firms enjoy profit margins that allow them to make a big splash in office expansion.

Just as Houston is tied to the energy industry, Washington, D.C., with government and Miami with banking, New York is the home of Wall Street financiers. Yet financial services companies aren't the city's biggest industry, despite the cachet of companies like Goldman Sachs and Brown Brothers Harriman.

Securities firms, which are how most financial services companies are classified, are only the seventh-largest industry in New York, providing 170,000 jobs in April, according to numbers from the city Office of the Comptroller.

Other industries provided a total of about 2.4 million jobs: government; trade, transport and utilities; health; professional services; leisure and hospitality; and insurance and real estate.

However, financial services firms saw 6,000 jobs created over the past year, while other industries saw job losses. Sammons said financial services jobs have increased in the last three months, which will have a direct effect on commercial real estate.

That may mean financial services firms are finally filling the space they rented in anticipation of an upturn. Big chunks of space got locked up in late 2004 and early 2005, as Citigroup went on the prowl for space despite layoffs and Morgan Stanley recommitted to Downtown by taking 447,000 square feet of space at 1 New York Plaza.

Brokers speculate that the rush on the office leasing market by securities firms may have been an attempt to lock in low rental rates in anticipation of future hiring. Also, financial services firms tend to take large chunks of space all at once.

The deals have continued, with CIT Group's recent relocation of its global headquarters to New York seen as a good sign for the industry's prospects. CIT signed on for 130,000 square feet of space at 505 Fifth Avenue in Midtown.

Another notable deal was Citigroup's expansion into 250,000 square feet of space at 485 Lexington Avenue. The deal, which hadn't closed as of mid-June, will add to Citigroup's approximately 4.75 million square feet of leased office space, split between Midtown and Downtown, Sammons said.

Citigroup is the largest lessee of office space in New York City, nosing out JP Morgan Chase & Co., which leases about 4.6 million square feet of space, also split between Midtown and Downtown.

JP Morgan turned heads in March when it made 712,000 square feet at 245 Park Avenue available for sublease, which drove up asking rents in the district over $1 a square foot that month.

Some market observers downplay the significance of the 5 percent chunk of the office leasing market held by the largest securities companies, though others view it as a commercial leasing bellwether. Law firms in particular have been capturing headlines with their leasing deals over the past several years.

"The top seven [finance] companies are about 21 million square feet of space leased," said Richard Persichetti, senior research analyst with Grubb & Ellis. "That's less than the available space that we have on the market. We have about 33 million square feet of vacant space. And it's a healthy market."

The city's largest lessees could shed their space simultaneously, and while it would rock the overall market, it wouldn't be devastating.

But it could make a big difference in a submarket, said Andy Peretz, executive director at Cushman & Wakefield. While the Midtown market tends to be more diverse in terms of the industries that populate it, Downtown's "Wall Street" brand has stuck due to the dominance of financial services firms in its market.

The six largest financial services lessees have taken about 4.1 percent of the Midtown/Midtown South market, but leased about 9.7 percent of the Downtown market, according to industry sources.

The homogeneity of the Downtown market makes it more vulnerable, Peretz said.

"Midtown is a mix of all different types of industries," he said. "Downtown tends to be more of a one-trick pony."

Of the top six firms, while Citigroup and JP Morgan are split between the two markets, Credit Suisse and Morgan Stanley have most of their space in Midtown/Midtown South, and Bank of New York and Merrill Lynch are mostly located Downtown.

If major Downtown tenants such as Merrill Lynch, Goldman Sachs or AIG decide to shed space or leave the area, it's much more significant, Peretz said.

"If a market's got 15 percent availability, like Downtown, and JP Morgan Chase puts 700,000 feet on the market, and it kicks it up another percentage point, you've got a real issue," he said. "But if the market's got a 7 or 8 percent availability rate, like Midtown, and space comes on, that might make the market more healthy and bring it more toward equilibrium."