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COMMERCIAL REAL ESTATE: DOWNTOWN MANHATTAN;
Sept. 11 and a Recession Add to Sublet Vacancies
April 3, 2002
by JOHN HOLUSHA
The amount of downtown office space being offered for subleasing
has surged in recent months as a result of layoffs caused by
the recession and the decision by some companies not to return
to the area after Sept. 11.
Although there is plenty of space available all around Manhattan,
in the downtown area the space offered by tenants has come to
overshadow that being offered directly by landlords. According
to Bruce E. Surry, an executive managing director of Insignia/ESG,
a major brokerage and services company, 54 percent of all the
space on the market downtown is sublease space.
Other companies disagreed over the exact numbers, but not the
general direction. Williams Real Estate, which put the sublease
sector at 47 percent of the total availability, said in a recent
report that "never in its history has New York City experienced
that kind of phenomenon." There is now about 4.8 million
square feet of sublet space available downtown, out of roughly
95 million square feet of office space in the submarket.
Real estate executives differ as to whether this is a temporary
development that will fade away as economic recovery takes hold
or something that might grow as tenants resist moving to downtown
because of concerns about transportation difficulties and fears
about possible health hazards.
Bruce Mosler, president of United States operations for Cushman
& Wakefield, another large brokerage and services company,
said he did not expect to see the recent rapid growth in sublet
space continue. "I think it has stabilized and we won't
see an increase in the amount of space on the market,"
he said.
Mr. Mosler said the fallout from the bankruptcy of the Enron
Corporation caused a delay in corporate decision making as companies
checked to see if their balance sheets were in good order. He
said companies would soon move to take advantage of downtown
rents that are a bargain compared with Midtown.
But James
Meiskin, president of Plymouth
Partners, a brokerage firm that represents tenants, said
a lot of his clients were reluctant to look downtown. "Downtown
is not currently a priority location for New York-based companies,"
he said. "There are concerns about health-related issues.
There are transportation issues and infrastructure issues. A
lot of companies are scared. And they see that a lot of companies
that were in the World Trade Center are not going back to that
area."
The amount of sublease space downtown grew from 2.3 million
square feet in the second quarter of 2001 to 3.7 million square
feet in the first quarter of this year. Typically when the amount
of space on the market increases, rents soften. Space that averaged
$41.46 a square foot in asking rent in early 2001 was down to
$39.72 in the first quarter of this year, according to figures
compiled by Cushman & Wakefield.
One traditional attraction of office space downtown was that
it was cheaper than in Midtown. Although the average rental
in Midtown is down from its high of $64.11 a square foot in
2000, it remains, at $51.74, considerably more expensive than
downtown, according to the Cushman & Wakefield figures.
Sublease space has also increased in Midtown, where the total
vacancy rate was 13.5 percent at the end of last year. The amount
of sublease space increased to 7.2 million square feet in the
first quarter of this year from 5.1 million square feet in the
second quarter of last year, according to Cushman & Wakefield.
But with a total of 21.3 million square feet of space available
in Midtown, the sublease segment is less of a factor than in
downtown, accounting for about 29 percent of the space on the
market.
Since financial incentives are available to employers who bring
jobs downtown, brokers are urging prospective tenants to lock
in bargains now and advising landlords not to be too picky if
brokers show up with a tenant ready to sign a deal.
"The demand for space downtown is not deep," said
David L. Itzkowitz, a senior vice president of the Equis Corporation,
a brokerage firm. "Our advice to landlords is to sign the
first guy who passes the smell test, because we don't know when
the next one will come along."
On the other side of the table, tenant's brokers are urging
tenants to lock in deals while rental rates are low and before
the effect of billions of dollars of federal redevelopment aid
become visible. "Going forward, we are telling people that
this is a good time to make a deal while the market is low,"
said Marc R. Shapses, a senior managing director of Julien J.
Studley, a brokerage firm that represents tenants. "The
federal government has committed $21 billion and downtown will
be the place to be in two or three years."
Tax breaks and other financial incentives intended to retain
businesses south of Canal Street and attract others to the area
should begin to have a powerful impact as the area near the
World Trade Center is cleaned up and streets are reopened, said
Augustus B. Field, a senior director of Cushman & Wakefield.
"These incentives are worth $3,500 a person and they are
available to sublets," he said. And the incentives are
even higher in the area immediately adjacent to the former trade
center. "We are talking $5,000 per employee at 1 and 2
World Financial Center and 1 Liberty Plaza," he said, referring
to buildings close enough to the trade center site to have been
damaged in the collapse of the twin towers.
Although not a lot of leases have been signed recently, brokers
report an increase in activity, with prospective tenants looking
at available spaces. "There is an increase in the amount
of space being shown and the number of people looking,"
Mr. Surry said. "That will eventually lead to leases, although
it is a slow process."
An article on Wednesday about an increase in office space offered
for sublease in downtown Manhattan omitted attribution for the
vacancy rate in Midtown at the end of last year. That figure,
13.5 percent, was calculated by Williams Real Estate. Other
figures in that section of the article were supplied by Cushman
& Wakefield, which calculated the Midtown vacancy rate as
8.2 percent.
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