A Manhattan Stirred, Not Shaken

Commercial real estate in Manhattan found itself stirred, though not shaken, in the first quarter of 2012. By that, I mean market fundamentals had a dash of bitter(s), but were neither completely bitter, nor sweet.

First let's run through the basic numbers. The overall vacancy rate for this 461-million-square-foot market did ease 30 basis points during the first three months of the year to close at 10.6%. And the overall average asking rent did climb 3.2% over the same period to close at $53.07 per foot. Meanwhile, gross leasing activity wrapped up the quarter at 6.1 million square feet, while net absorption came in on the positive side of the column—albeit at a rather anemic 164,773 square feet. Now let's break down all the ingredients and see how it comes out.

The vacancy rate improved over the quarter, but if we start the timeline in January, the story changes with the overall figure actually climbing 30 basis points over that two-month stretch. Direct availability was only slightly higher; it was sublet availability making this Manhattan a bit cloudy, climbing almost 900,000 square feet since January. The majority of that increase occurred in Midtown from financial services firms (JPMorgan Chase, Citibank, Societe Generale) as well as a pharmaceuticals firm (Pfizer).

This made many pundits a bit nervous with flashbacks to 2008 and 2009, when so much space returned to the market. But the total sublet figure must be kept in perspective. The overall Manhattan number now stands at 9.8 million square feet, well below the over 17 million square feet during the peak of the downturn. It would take an economic implosion for it to reach that number again. As an aside, there is about 10 million square feet of office construction under way in Manhattan; much of that is not due to be completed for another 18 to 24 months, leaving plenty of time for the overall vacancy rate to tighten (potentially too much).

Asking rents have been rising at a slow and steady pace, not only in the first quarter but also since the beginning of 2011. Midtown and Midtown South have recorded the most improvement while Downtown has remained rather flat. Figure on a continued climb in Midtown with landlords being particularly aggressive on premier buildings in prime locations while Midtown South may see an even steeper rise due to its continued popularity by tech/media firms.

There is one word to describe gross leasing activity and net absorption in the first quarter: weak. Gross leasing recorded its second worst quarter in at least 18 years, coming in at 6.1 million square feet (the first quarter 2009 wins the dubious "worst" title at 5.9 million square feet). Driving this weakness was everything from global/national issues (fuel prices, euro crisis, financial regulations) to local issues (numerous tenants renewing early last year ahead of expected price increases).

On the positive side, local job growth has been incredibly strong, with some 30,600 office jobs created in New York City in 2011 and another 19,400 added in the first two months of 2012. Expectations are for a pick-up of both leasing activity and net absorption, especially in Q3 and Q4.

All of the above-mentioned fundamentals have thus left the Manhattan commercial real estate market stirred but not shaken in this year's first quarter.