A Rising Global Tide Lifts Manhattan

NEW YORK CITY-Manhattan’s recovery, already stronger than most, could be pumped up further by the city’s ties to world commerce. “Even though we’re part of the USA, we’re part of the global economy and we’ll take off with the global economy,” Mark Jaccom, CEO of the tri-state region for Colliers International, said at a Colliers media briefing Wednesday.

Jaccom’s prediction was underscored by a presentation from the firm’s chief economist, Peter Kozel. He noted that the global economy is expected to grow faster than the domestic one: 3.5% to 4% in 2011, compared to a projected 1.5% to 2% increase in US GDP next year. Were the domestic economy to reach its “true potential” for growing 3.5 to 4% over the next 12 months, the comparable growth rate for the globe would be 5%.

“True potential” was one of three growth scenarios charted by Kozel at Wednesday’s briefing. The most likely one calls for payroll employment in the US to increase by 1% next year, compared to 1.2% to 1.5% for New York City. The city would continue outpacing the country in terms of recovery, with rental rates rising basically at the rate of inflation.

Another possibility is that of renewed recession, and while Colliers gives that less of a chance of occurring than a consensus would suggest, Kozel cited the slight rise in November’s national unemployment rate, coupled with October’s “very dramatic move” by Treasury secretary Ben Bernanke to introduce another round of quantitative easing. The uncertainty these events suggest is "a real danger to New York,” Kozel said, noting that “major credit issues” could manifest in the economy.

That being said, the probability of the “renewed recession” scenario comes in third behind the “true potential” scenario in Kozel’s view. Were that scenario to pan out, US unemployment could decline to 8.5% by the end of next year, for example, while Manhattan office rents could increase by 5% to 10%.

The strength of the island’s current recovery is reflected in the office vacancy figures. Year-over-year Colliers numbers show a downward progression from the fourth quarter of 2009 for Midtown and Midtown South: from 14.9% to 12.4% in Midtown, and from 11.7% to 10.8% in Midtown South.

Although Downtown’s vacancy rate bulged from 13.0% in Q4 ’09 to 16.4% in Q3 2010, due primarily to long-expected givebacks of large blocks of space by financial firms, Colliers expects the rate in that submarket to decline by two percentage points by the end of this year. Separately, Cassidy Turley’s monthly report for November showed the Manhattan vacancy rate overall ticking down from 12.4% in October to 12.3% last month, the lowest since March 2009.

If Kozel’s most optimistic predictions for recovery pan out, in 2013 or 2014 “there is going to be a tightness of space,” Jaccom said. Already, he added, the leasing market is marked by a “tremendous amount of activity,” and Kozel pointed out, “All of the great deals that were available nine months ago in terms of sublease space—they’re gone.”

Executive chairman Robert Freedman noted that for the first time since the capital markets meltdown, “we’re seeing tenants expanding, and expanding by 15% to 20%.” In the Midtown office portfolio of one major landlord, year-to-date leasing volume has included 28% expansion space and 9% deals by tenants new to the city.

On the investment sales side, Freedman disputed the notion that cap rates have been unrealistically compressed. He provided a rational basis for the current rates: the returns on Treasuries plus 200 to 250 basis points. That means cap rates of 5.5% to 6%, in line with what trophy assets have traded for lately. “These are not artificially low cap rates,” said Freedman.