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As seen in
New York Business
July 16 - 22, 2001
Growing glut of surplus space drowns
market
by LORE CROGHAN
Roger P. Griswold Jr. starts at the top of the building and
painstakingly works his way down floor by floor, knocking on
every door. His humbling mission: to find takers for the acres
of excess office space his clients have dumped back onto a Manhattan
market suddenly glutted with it.
Last year, Mr. Griswold, a first vice president at CB Richard
Ellis Inc., had the best year of his decade-and-a-half career.
He found 400,000 square feet of new space for his customers
to lease. This year, though, the Manhattan market has slipped
into reverse in the form of increasing sublets - 9 million square
feet of them, up from a mere 2 million square feet a year ago,
according to brokerage Insignia/ESG Inc.
Suddenly, companies are slashing asking prices for sublets,
offering giveaways and even dangling prizes before brokers in
an increasingly desperate effort to unload office space that
in a shrinking economy they no longer need, and all too few
other companies want.
For the market's highly paid foot soldiers - the brokers - the
change has been nothing short of wrenching. "It's a matter of
working twice as hard for half the money," says Mr. Griswold,
who is currently showing more than 100,000 square feet of sublets.
Today, sublets have catapulted to 35% of the total office space
available in Manhattan, more than double the 14% share of a
year ago. And every day more sublet offerings are added.
The explosion in the volume of sublets is bringing profound
change to the city's commercial real estate market. After half
a decade of uninterrupted rent rises, even double-digit rent
cuts and other sweeteners are failing to draw subtenants, a
lapse that is now gnawing away at the gilded foundations of
the entire market.
Brokers say that tenants who don't face imminent lease expirations
are now reluctant to pursue deals because they aren't sure how
the shaky economy will affect their businesses. In addition,
many tenants now expect rents to get lower in a few months.
To make matters more dire, in the summertime leasing activity
slows in Manhattan, even in the busiest of years.
Mounting agony
Brokerage firms are feeling the pain. Publicly traded Grubb
& Ellis Co. blamed a recent quarterly loss on reduced transaction
volumes. CB Richard Ellis cut 160 jobs nationwide and reduced
the bonuses of its senior management.
Individual brokers are hurting, too. The commissions they live
on are fewer and farther between. And as agents for sublet space,
they can only look forward to receiving half-commissions when
they complete deals. When they represented tenants seeking space,
they got full commissions.
Already, it is clear that there are
too many brokers chasing too few deals. "There's going to be
a winnowing of younger brokers and older dinosaurs," predicts
James Meiskin, the president of Plymouth Partners Ltd.
Never known as meek and mild, brokers don't
plan to go down without a fight. They are working aggressively
to chip away at the massive overhang of sublets. They are advising
clients to slash rents and give subtenants periods of free rent
and money for interior renovations.
Some of the discounts are drastic. The asking rent for one short-term
sublet at 111 W. 40th St. is in the high $20s a square foot;
the rate for space leased directly from the landlord on the
same floor is $50.
Just to get reps for prospective tenants to visit their space,
sublet brokers now increasingly throw parties with expensive
giveaways. At a recent Newmark & Co. Real Estate Inc. bash to
promote Matthew Bender & Co.'s 126,000-square-foot sublet at
2 Park Ave., the prizes included a trip for four to the Doral
in Miami with rounds of golf thrown in for good measure. Plain
old canvassing techniques such as Mr. Griswold's door-to-door
effort are on the rise. Brokers also scour electronic databases
to find tenants with looming lease expirations. Many are inundating
anything that looks remotely like a prospective subtenant, and
the brokers who might possibly represent them, with promotional
e-mails.
Desperate measures
Those e-mails themselves have now become an art form. Brokers
try to write these messages in a dramatic way that will get
them read, but that can be tricky because many lease agreements
forbid companies from publishing sublet rents that are lower
than what landlords are charging. To telegraph the idea of price
cuts without specifying numbers, Jane Roundell, a director at
CRESA Partners New York, refers to her clients as "motivated."
Brokers are also pushing their follow-up phone calls to new
heights. An exasperated tenant rep recently told John Maher,
a CB Richard Ellis senior vice president: "The guy working for
you is hounding my client. We'll come see your space."
Despite such strenuous efforts, though, brokers concede that
a good portion of the sublets now available simply will not
get rented unless tenants slash their prices even more severely.
Some space isn't going to move at all. So tough has the market
become that some brokers are refusing sublet assignments that
don't have good odds for success. Glenn Markman, an executive
managing director at Grubb & Ellis, won't handle space unless
it has at least one special thing to recommend it: below-market
rent, handsome interior construction or a location in a trophy
building.
Even by the most optimistic calculations, the near paralysis
gripping the leasing market is expected to continue at least
until autumn. Until that revival comes, brokers will be under
the gun. "There's a lot of pressure," says Ruth Colp-Haber,
a partner at Wharton Property Advisors Inc. "If you can't perform
for your clients, you're not worth anything."
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