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As seen in
January 30, 2002
Manhattan Office Market Occupancy
At 5-Year Low
by JANET MORRESSEY, Dow
Jones Newswires
Manhattan's office
real estate market saw its occupancy plunge to its lowest level
in five years in 2001, and, surprisingly, much of the decline
came prior to the Sept. 11 attacks, according to a new study.
The report, to be released later this week by brokerage and
tenant representative firm Plymouth Partners, showed Manhattan's
vacancy rate,which reflects vacant and sublease space, more
than doubled to 10.9% by Sept. 10, 2001, from its 5.1% rate
in 2000. By year end 2001, it had ticked up to 11.6%.
"A maelstrom of negative factors" - the weak economy, the Internet
blowup, shriveling advertising revenue and the devastating events
of Sept. 11 - all took a toll on the once-hot New York market,
the report said. "Corporate downsizing and the implosion of
high-tech industries" caused vacancies to shoot up in 2001,
it said.
While many observers noticed the real estate crunch after Sept.
11, the crumbling actually began much earlier. "The market was
really beginning to tank nine months earlier" as companies consolidated
operations, laid off staff and began reassessing their real
estate needs, said Mark Thompson, managing director of Plymouth.
"Suddenly the longest real estate boom that we experienced in
a generation came to a grinding halt," he said.
For nine consecutive years, demand outpaced supply in the Manhattan
market as property owners were able to lease up virtually any
new space that came on. All that ended in 2001 and "all the
gains that had been made in the past five of those years were
wiped out," Thompson said.
In 1999 and 2000, for example, leases for about 15 million square
feet of space were signed on a net basis, taking into account
new space and space that had become obsolete, among other factors.
But by Sept. 10, 2001, about 21 million feet had been dumped
back onto the market, and by year end, that figure had climbed
to about 36 million, according to Thompson.
The growth of sublease space was a major factor. As companies
began downsizing and laying off staff, many began putting some
of their leased real estate up to be sublet. In 2000, only 3.2
million square feet of space was available for sublease, accounting
for about 15% of total inventory. That figure skyrocketed in
2001 to 15 million square feet, representing 33% of total inventory
by Sept. 10, and to 16.8 million feet, or about 35% of total
space available, by year end.
Hardest hit was downtown New York. Its vacancy rate climbed
from an historic low of 4.6% in 2000 to 9.1% by Sept. 10, 2001.
Even though this market lost more than 13 million square feet
of space in the terrorist attacks, the vacancy rate soared to
13.1% by year-end.
Midtown Manhattan, though the most resilient of the New York
markets, still weakened in 2002. Its vacancy rate doubled to
10.2% by Sept. 10 from 5% in 2000. However, the influx of displaced
tenants snapping up space in midtown helped to bring down the
vacancy to 9.6% by year end.
In Midtown South, where Internet companies
deluged the market in the 1990s, the vacancy rate surged to
13.5% from 5.5% in 2000, due to the dot-com collapse. As demand
fell, so did rents. Average asking rents were 10% lower in 2001
than in 2000. And when incentives, such as free rent and construction
allowances, are factored in, the "effective" rent was about
half of what it had been a year earlier, said Thompson.
Looking ahead, Plymouth expects conditions to continue to deteriorate
in downtown Manhattan. "There will be virtually no demand for
downtown office space until the transportation infrastructure
is rebuilt, rents drop further and government enacts incentives
rich enough to attract cost-conscious tenants," the report concluded.
Thompson expects midtown Manhattan to recover faster - possibly
as early as the second half of 2003. All bets are off though
if a flood of companies follow the lead recently taken by Goldman
Sachs and Morgan Stanley to relocate a big chunk of their businesses
outside Manhattan's borders.
Still, the report predicts New York will bounce back. "Resiliency
and creativity lie deep within the souls of New Yorkers," the
report said. "Recovery depends not on bricks and mortar, but
on the health of the companies that employ New York's workers
and generate its tax revenues."
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