Market Holds its Own Despite Softening Rumors

[IMGCAP(1)]NEW YORK CITY-The local office market continues to feel the impact of the turmoil affecting the global financial markets, and although brokerage firms see overall vacancy rates increase, the waters aren’t as gloomy as they could be. Richard Persichetti, manager of client services at Grubb & Ellis, tells GlobeSt.com that direct average asking rents have declined, however he notes that “despite average asking rents beginning to trend downward, prime spaces continue to command high prices in select areas of Manhattan when compared to their respective submarket.”

As the industry knows, all brokerage firms gather their data differently, so statistics and findings will vary. CB Richard Ellis’ Q2 2008 report shows office rents rising slightly from May to June. Overall Manhattan asking rents rose from $71.35 per sf in June from $71.25 in May, as availability rose to 9% from 8.9%, and absorption improved to negative 0.25 million sf from negative 0.37 million sf. June was a strong month for leasing activity, especially Downtown, with large leases such as American International Group‘s 803,000-sf lease at 180 Maiden Ln, among others.

According to Grubb & Ellis, the office market reached its peak in the real estate cycle during the first quarter, as available supply continued to increase and demand for space remained sluggish. In the second quarter, the overall vacancy rate climbed 70 basis points from the first quarter to 5.6%, the largest one-quarter vacancy increase since the fourth quarter of 2001. The firm says that negotiations are still in the landlords’ favor, but tenants are beginning to gain some leverage when compared with the last three years. “Concessions in Midtown have already increased compared to this time last year, with an average of an additional $3 per sf in work being offered and one to two additional free months of rent included in the lease,” the report says.

[IMGCAP(2)]Jones Lang LaSalle’s report also shows that average asking rents have moved higher, however they note that the pace at which they are rising has slowed. James Delmonte, vice president and director of research, at JLL, also sees a rise in concession packages. “In the first half of 2007, class A rents rose citywide by more that 18%. During the same time period this year, rents have increased by just under 4.5%. Current market conditions are being reflected in changing landlord concession packages.” Delmonte says that “it appears the second half of 2008 will be a difficult period for the Manhattan office market. Although the New York office market is still technically within equilibrium, the overall vacancy rate has increased every month since January 2008.”

Delmonte continues that “the amount of available class A space in Midtown alone has increased by two million sf during the past 12 months. However, the increased availability of large blocks of space may finally mean more choices for Midtown tenants with space requirements of more than 200,000 sf.”

Grubb & Ellis also sees an increase in available large blocks of space—60 exist in excess of 100,000 sf, more than double the amount available one year ago. “Also, tenants have placed more than 1.5 million sf of sublease space on the market since the start of the year.”

[IMGCAP(3)]Cushman & Wakefield’s report shows that despite an increase in vacancy, average asking rents continued to increase. According to Joseph Harbert, COO of the New York Metro Region for Cushman & Wakefield, “leasing activity is nearly on par with 2007, no doubt due to the number of large leases signed during the first half of the year,” he says, referring to the 21 leases of more than 100,000 sf completed in the first six months of 2008. At this time last year, only 13 such leases had been signed.

Grubb & Ellis shows that demand for space has slowed, with leasing velocity through the first six months of the year down 19% compared to the same time last year. “The drop in demand is attributed mostly to the cutback in leasing from the financial services sector,” the report says. “In fact, this industry has been the primary seeker of space over the past seven years, and has accounted for more than 30% of the markets activity. This sector has scaled back space requirements, and has only participated in 20% of the sf leased this year.” C&W agrees that just one year ago, the industry accounted for more than one-third of all leasing activity in Manhattan, however their firm finds that financial services accounted for only 14.1% of leasing activity this year.

[IMGCAP(4)]CBRE addressed the financial services sector at its Q2 report, noting that although hit hard by the economy, financial firms have not been shedding space at a level proportionate with layoffs, noting that the space shed is roughly one-third less than standard industry benchmarks might suggest. CBRE says that, according to reports–not CBRE estimates–there have been roughly 20,000-financial-firm-layoffs in Manhattan thus far, but they have dumped only 1.4 million sf on the market.

“The Manhattan office market continues to be resilient as second-quarter absorption and leasing showed improvement over the first quarter, and relocation transactions combined with renewal activity has been close to 2007′s levels,” says Howard Fiddle, vice chairman of CBRE. “However, while the spread between asking and taking rents year-over-year remains essentially flat Downtown, we are beginning to see a slight widening in the spread in Midtown and Midtown South, indicating tenants are wielding more clout in lease negotiations.”