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As seen in
March 18, 2001
Commercial Property
The Office Market Is Feeling the
Economic Jitters
The pace has slowed, euphoria is gone,
but no one is panicking.
by JOHN HOLUSHA
Jitters from
the gyrations of the stock market and the uncertain economic
outlook for the country appear to be finding their way into
the market for office properties in New York, real estate executives
report. They say that the pace of leasing deals has slowed as
prospective tenants reassess their space needs and that properties
outside the central business district in Midtown have seen an
erosion in pricing.
Nobody is panicking. The overall vacancy rate in Manhattan is
between 5 and 6 percent, still well below the 9 to 10 percent
that is considered an equilibrium market. And rental rates in
core areas are firm. But the euphoria of the last few years
appears to be gone.
"Economic pessimism seems to be spreading to the commercial
real estate market," said Mary Ann Tighe, vice chairwoman of
Insignia/ESG, the brokerage and services company. One indicator
is that more space is coming onto the market, mostly via subleases,
than is being removed by direct leases, a condition known as
negative absorption.
"We have negative absorption in all three submarkets for the
first time since October 1998," she said, referring to the first
two months of this year. Citing the negative-absorption figures
area by area, she said: "There was 1.4 million in Midtown South
and 500,00 in downtown."
Robert L. Billingsley, executive vice president of Colliers
ABR, another brokerage and services company, said that "we began
to see a slowdown in activity and a slowing of the increase
in rental rates in the October, November, December quarter."
"And in January and February it was definitely down," Mr. Billingsley
said. "It's as if we were going 85 miles an hour and suddenly
slowed to 50."
The collapse of numbers of dot-com firms and the shrinkage of
others, along with cutbacks at the advertising agencies and
other service companies that had grown swollen with dot-com
work, are the major reasons for the space being returned to
the market, real estate specialists say. And since financial
services companies typically lay off large numbers of people
when the economy turns down, more space is expected to become
available, particularly downtown, where the industry is concentrated.
"A lot of these companies took space in anticipation of growth
or as a defensive gesture," said Anthony E. Malkin, president
of W&M Properties, an investment and development company.
"So it is not surprising that things are getting softer downtown,
because the securities industry is the only one it has. If the
securities industry gets the sniffles, downtown gets a bad cold."
Uncertainty about the future is
leading many companies to put off making decisions about office
leases as long as possible, market participants say. "People
are on the sideline and there is very little market activity,"
said James Meiskin, president of Plymouth Partners, which represents
tenants. "Companies do not know where the economy is going and
whether they are going to have to lay off people. So if they
do not have to make hard and fast decisions, they are not doing
so."
Mr. Meiskin said the slowdown is giving tenants more negotiating
power after several years of a market where landlords were able
to dictate the terms. He said that while asking rents have shown
little movement downward, owners are willing to contribute more
toward the cost of interior construction and to extend the period
of free rent. "Owners who were offering $20 a rentable square
foot in work are now offering $35 a square foot," he said. "Nine
months ago the free rent period was one month. Now it is three
to six months, in addition to construction time."
Tenants who have the luxury
of time to make a decision on whether to move or renew a lease
are best off waiting, because some bargains may be coming to
the market, said Peter Pattison, who runs a real estate advisory
business under his name. "The market has peaked and is due to
come down considerably in the next six months," he said.
He said cutbacks in the financial services industry could have
a major impact on the office market in Manhattan. If a big financial
services company "cuts 10,000 people, that throws about 2 million
square feet of space back on the market," he said. "That is
a lot of space."
Mr. Meiskin, the tenant broker,
said that some of his clients were estimating that 3 million
to 5 million square feet of space would come back to the market
as a result of layoffs and cutbacks over the next years.
"Demand is evaporating in places like
Midtown South and downtown, even if a lot of owners don't want
to admit it yet," said Joseph T. Palombi, executive vice president
of Trinity Church Real Estate, a major landlord in the Midtown
South area.
He said about 500,000 square feet
of the church's 6 million square foot portfolio remains available,
much of it upgraded to office space from industrial use over
the last five years. He said he was willing to negotiate to
fill the space with desirable tenants. "We are not panicking,
but we'll deal," he said.
But some real estate executives say any weakness is confined
to Class B and C properties, generally older buildings less
well equipped and located than Class A buildings, in places
like Midtown South and the far west side of Manhattan. Rental
rates and demand for Class A buildings in Midtown remain strong,
they said. And, unlike the late 1980's, there is no surplus
of newly constructed buildings to overhang the market.
"I don't think we are going to see a significant drop in asking
prices in Midtown," said Allan B. Rothschild, a senior vice
president in charge of New York office of CB Richard Ellis,
a brokerage and services company. "Although the pace of transactions
has slowed somewhat, we recently concluded one in Midtown where
there were three backup bidders."
He added that there is so little space available in prime buildings
in Midtown that landlords have little incentive to lower their
prices or offer more attractive terms.
Statistics, of course, tend to lag a changing market, but figures
published by Colliers ABR for the month of January tend to back
this assessment of the situation in Midtown. The vacancy rate
for Class A properties in Midtown fell to 4.7 percent in January,
down from 4.9 percent in December and 5.8 percent a year earlier.
The same report noted that asking rents for these properties
stayed essentially flat at $65.34 a square foot a year, 10 cents
a foot below the December average.
For all of Manhattan, the vacancy rate for Class A buildings
fell to 4.3 percent in January, down from 4.5 percent in December
and 6 percent a year earlier. Asking annual rents increased
to $60.08 a square foot, up from $58.53 a square foot in December
and $49.11 a square foot in January 2000.
Barry Gosin, the vice chairman and chief executive of Newmark
& Company Real Estate, a brokerage and management company,
described the market as "relatively solid, because the amount
of people let go is still small." He said that unlike the late
1980's, when layoffs and vast amounts of empty space drove rental
rates down sharply, the current situation more closely resembles
the early 1980's.
"The market has flattened out the way it did in 1982, and is
likely to remain flat for several years as it did then," he
said.
Although demand has softened on the West Side and in Midtown
South, he said the situation varies on a building-to-building
basis. "It is the marginal product that is being affected as
tenants opt for a better product in this kind of market," he
said. Space in the Chelsea Market building between Ninth and
10th Avenues and 15th and 16th Streets remain strong, he said, despite its location away from
the Midtown core.
Josh N. Kuriloff, an executive vice president of Cushman &
Wakefield, the brokerage and services company, said: "There
has been a slowdown in demand, but there has been no increase
in supply to drive up vacancy rates. The euphoria is out of
the market and we are back to basics."
Those basics, he added, include locations close to public transportation,
shopping, restaurants and amenities. He said that far west side
locations, such as the Starrett-Lehigh building at 26th
Street and the West Side Highway, are likely to experience sharp
dropoff in demand.
"Using shuttle buses to get to public transportation makes no
sense," he said. "I did not understand it during the euphoria
and I do not understand it now.
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