"Announcements by several investment and commercial banking firms have fundamentally altered the landscape of Wall Street," says James Delmonte, VP and director of research for Jones Lang LaSalle, in a release announcing the firm's Q3 report. "While the long-term effects of the sweeping changes in the financial sector are difficult to assess, there will be a significant impact on Manhattan's office market." Grubb & Ellis' Richard Persichetti sees the beginning of an office downturn that will last two to three years, while Cushman & Wakefield's Joseph Harbert predicts a tenant's market in the making. By contrast, CB Richard Ellis' newly released report on supply and demand says the Manhattan office sector's inherent strength will sustain it, and the impact on asking rents will be modest.

[IMGCAP(2)]"I don't see 150% of Moody's projections hitting the market at bargain rents," Stephen Siegel, CBRE chairman of global brokerage, said Wednesday at a breakfast presentation. Siegel was referring to the Moody's Economy.com forecast of 97,000 layoffs in Manhattan, a figure that CBRE used in its report as the middle ground of three layoff scenarios. The "high layoff case" of 145,500 office-using job losses represents 150% of the Moody's estimate, and would put more than 18 million sf of space back on the market and lead to a 25% drop in asking rents.

[IMGCAP(3)]Siegel described himself as "a cautious optimist" and pointed to the Manhattan market's still-vigorous leasing activity, including the Macquarie Group's 260,000-sf renewal and expansion earlier this week. "The perception is that this market is dead and dying, and that's not true," said Siegel.

With that said, both the CBRE and C&W reports observed that 6.5 million sf of sublease space was available as of the end of Q3, the most since Q3 2005. However, JLL's report pointed out, the total amount of sublease space as a percentage of available space is still below the historical average of 26.1%. "Given that the situation with major financial institutions continues to evolve, it is unclear how much space will be returned to the market," according to JLL's report. For his part, Persichetti puts the current total at 8.9 million sf, or 25% of available space.

[IMGCAP(4)]Siegel and Simon Wasserberger, SVP of CBRE's New York tri-state region consulting group, cited a number of factors they see as mitigating against a steep decline in asking rents. One is the increased desirability of New York City as a place to live, by comparison to the city's liveability in previous downturns going back to the 1970s. Another is the financial solidity of Manhattan's 65 top landlords, most of whom acquired or refinanced their assets with less than 75% leverage. "If you have a one-million-sf building and 20,000 sf is vacant, you'll ride it out" rather than lower asking rents to fill the space, Siegel said.

Still another, Wasserberger said, is the fact that layoffs do not automatically lead to space being given back or subleased. For example, he said, following the bankruptcy of Lehman Brothers and the sale of most of its assets to Barclays Capital, very little of the investment bank's office space went on the market. Moreover, tenants who downsize may hang on to their unused space, because consolidating that space can be costly, and so can taking out new leases when companies are again in hiring mode. "You can't sublease a vacant desk," said Wasserberger.

At C&W's quarterly press event on Tuesday, the presenters made it clear that turmoil nationwide was taking its toll here. "You cannot talk about real estate without talking about the economy," said Harbert, COO of C&W's New York metro region. Ken McCarthy, C&W's managing director for the New York area, noted that of the 760,000 layoffs across the US so far this year, 400,000 represent office-using jobs. "This is a white-collar recession," said McCarthy, adding that while the effect hasn't shown up yet in Manhattan statistics, it soon will.

Harbert noted that YTD leasing activity, 15.7 million sf, is the lowest since 2003's 12-month total of 20.1 million sf. On the other hand, the market is on pace to exceed last year's total of 30 deals for spaces of 100,000 sf or more: there have been 28 such deals in the first three quarters of 2008. At the same time, he said, there has been "some healthy velocity" in small leases.

Vacancy rates are up year-over-year in all three Manhattan submarkets, Harbert said. In Midtown, all neighborhoods aside from the Grand Central district and the West Side saw lower leasing velocity in the quarter, he said. Nonetheless, JLL's report noted that Grand Central and Columbus Circle, Downtown escaped a vacancy increase over the second quarter only because a building slated for office space was turned to residential use instead. Negative absorption of Manhattan's office space rose from 468,091 sf 12 months ago to 2.9 million sf today, C&W reported.

An overall drop in asking rents is still in the future, Harbert said, although he noted that they've already started to decline in some neighborhoods, while taking rents have already started to dip. "We're headed toward a tenant's market," he said.

JLL's report says that asking rents overall have started to decline, driven largely by "lackluster activity" Downtown. For his part, Persichetti, research manager for Grubb & Ellis' New York region, reported that class A direct average asking rents in Midtown have declined for two consecutive quarters, reaching $89.46 per sf at the end of Q3. In Downtown, class A rents slipped 1% to $54.61 from $55.16 per sf at midyear, he reported.

"With announcements of layoffs and consolidations throughout all industries and the New York City unemployment rate reaching a three-year high of 5.8% in August, uncertainty in the real estate market is afoot," wrote Persichetti. "But the shift will also bring opportunity for savvy tenants."

Instant Insights /

Financial Markets Produce Differing Office Forecasts

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