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As seen in
April 18, 1999
The Office Market Softens a Bit -
but it's Still Strong
by
JOHN HOLUSHA
The pace of office leasing in Manhattan
softened somewhat in the first quarter of 1999, after two torrid
years. But asking annual rents continued to increase - exceeding
$70 a square foot in some locations, although the average remains
much lower - and real estate executives say they see nothing
on the horizon to prevent the industry from having another prosperous
year.
"We are at the base of a slowly rising plateau," said
Anthony E. Malkin, the President of W & M Properties. "Supply
and demand are very nearly in balance, with demand slightly
exceeding supply. We can't see dislocations anywhere."
According to figures compiled by Insignia/ESG, a large real-estate
services company, 2.9 million square feet of office space was
leased in midtown in the first quarter of 1999, a substantial
drop from the 5.5 million leased in the first three months of
1998. And the amount of space added to the market exceeded that
taken off by 800,000 square feet, compared to the net withdrawal
of 450,000 square feet in the year-ago period.
Nevertheless, the average annual asking rent in midtown has
increased 20 percent over last year's first-quarter level, according
to the Insignia/ESG figures, to $44.79 a square foot.
"For some reason there was a rush to close deals in the
fourth quarter and so some that were set for the first quarter
got done before the end of the year," said Joseph R. Harbert,
the Chief Operating Officer of Insignia/ESG's New York Metro
Region.
Mr. Harbert said that rising rates were inducing some tenants
to leave midtown for less expensive parts of the city, but he
added that demand was such that rental rates still had room
to climb. "We have seen deals in the $70's," he said.
"Whatever drop-off there was in the first quarter did not
affect the high end of the market. And prices have not peaked
yet."
He said part of the problem was the short supply of available
office space. "When you have a primary availability of
7 percent," he said, "it means there is just not enough
space out there."
Because each company has different ways of categorizing and
counting transactions, the numbers vary from report to report.
But the trends are clear in all the reports. "The Manhattan
office market started 1999 at a slower pace after two back-to-back
record-breaking years," reported Cushman & Wakefield,
another large real-estate services company. "With traditional
large space users stalling expansion, overall leasing activity
was down 17 percent from the first quarter of 1998, the lowest
level of first quarter activity since 1995."
"There were no megadeals in the first quarter," said
Alex Cohen, Cushman & Wakefield's Senior Manager for research.
"Reuters and Rock West got done before the end of the year,"
he said, referring to the 855,000 square foot building that
the Reuters news agency is building with the Rudin family at
42nd Street and Seventh Avenue and the 1 million square foot
building the financial-services company Morgan Stanley Dean
Witter is planning to build with the Rockefeller Group on a
lot on Seventh Avenue between 49th and 50th Streets, just west
of Rockefeller Center.
But the lack of big deals in the quarter does not mean there
are none to be had, Mr. Cohen said.
He said the accounting firms of E & Y Kenneth Leventhal
and Pricewaterhouse-Coopers, the NASDAQ financial exchange and
the CIBC Oppenheimer financial-services company are all looking
for new locations and each is shopping for about 1 million square
feet of space.
"They are all looking for the best deal," Mr. Cohen
said. "They just haven't found it yet."
He said premium buildings in prime locations like 9 West 57th
Street, have been signing leases calling for annual rents in
the "low to mid-$70's." He said demand remains strong
for space along Madison and Fifth Avenues in the 50's by companies
that feel they need a presence in New York and a posh address
as well.
"The brokers are being contacted by people who say they
just have to be in New York City," Mr. Cohen said. "That
part of the market is as dynamic as any time in the last 24
months."
While some companies track vacancy rates, Williams Real Estate
uses a different measure, the vacancy rate plus all space expected
to come on the market within a year, and calls it availability.
By that measurement, the availability rate in Midtown South
decreased 0.4 percent to 7.8 percent, as a net 277,000 square
feet were taken off the market. This decline in space pushed
the average annual rent up 42 cents to $30.38 a square foot.
The availability downtown moved in the opposite direction, increasing
from 12.1 percent to 13.2 percent as an additional 1.1 million
square feet was added to the market. But the rent trend was
the same as the rest of Manhattan, with annual rent moving up
20 cents a square foot to $31.49.
"In the Williams' view, availability increased from 9.7
percent to 10.2 percent in the quarter, which added a bit of
liquidity to the market, but is not statistically significant,"
said Robert L. Freedman, the company's Vice Chairman.
Mr. Freedman said the explanation for the increase in rents
and availability downtown was the completion of renovation programs
in older buildings in the area and the offering of space to
the market. "A number of buildings have been redeveloped
and the rents reflect the better bricks and mortar," he
said.
According to his company's calculations, the average annual
asking rent in Manhattan is $38.45 a square foot, up $1.02 in
the quarter.
He said the question is where the "sweet spot" is
in the current market; that is, the highest rent tenants will
accept without motivating them to look elsewhere.
He said that $50 a square foot in annual rent was a resistance
point for many companies, so the question is how much below
$50 is considered acceptable. "The sweet spot is probably
around $42-$43 a square foot," he said.
If that is as high as most tenants are prepared to go, it insures
that there will be no new construction in midtown, because rents
of at least $50 a square foot are needed to justify building,
Mr. Freedman said.
The strong market is permitting landlords to reduce their concessions
packages, which have already shriveled from those in the early
and middle years of the decade. In those times owners offered
hefty packages of $40 or more a square foot for the cost of
interior alterations, and free rents of a year or more.
"In Midtown
South, in Flatiron, in Chelsea, the rents are up 20 to 30 percent
and the owners are offering nothing for work, they are as-is
deals," said James S. Meiskin, the President of Plymouth
Partners, which represents tenants.
He added that free rent was down to three or four months, which
is the time it takes to build the interior and during which
the tenant is not occupying the space.
He said the lack of space and the stiff terms being demanded
by the landlords are going to lead companies to look for alternatives.
"Some people are being driven to the fringes, to places
that had not even been looked at before," he said. "Now
people are looking at Ninth and 10th Avenues in the 40's and
50's."
He noted that the architectural firm Gwathmey Siegel & Associates
had located at 475 10th Avenue at 36th Street, a 1913 industrial
building that was renovated in 1994.
Some real estate executives attribute the
current prosperity to the turmoil in debt markets that started
last August and gradually settled down during the rest of the
year. Steeply increased prices for capital reduce the availability
of funds for development, they say, preventing overbuilding.
"The most significant fact today is the overhang from the
capital markets of last year," Mr. Malkin said. "Risk
capital for new development has disappeared. It's gone."
But, he added, "Financial markets are quite healthy for
viable projects. The money is available."
He said the uncertainty about buyers obtaining financing had
caused many companies, including his own, to withdraw properties
from the market or not offer them at all. "When the capital
market took the guns and swords out of the hands of children
the transactions market was distorted, " he said.
But with the crisis largely resolved, he said, he expects property
sales to begin to resume in the second quarter.
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