The latest news from the Manhattan office leasing market reflects the continued deterioration in the national and New York City economies during the first quarter of 2009. The amount of available space increased to 12% by the end of the first quarter from 8.4% at the end of March 2008, which eliminated much of the gain in office occupancy from mid-2005 through 2007.
by Peter Shakalis
These conditions should be no surprise considering the substantial employee reductions that large corporations have made along with curtailing their expansion plans for the foreseeable future. While many companies today are shedding excess space where they can, others are sitting on the sidelines taking a wait-and-see approach when it comes to their real estate needs.
The average asking rent for Manhattan declined to $65.18 per square foot last quarter from $74.50 per square foot in the fourth quarter of 2008. While the average rents had been declining for much of 2008, this most recent 12.5% drop in quarterly rents indicates that asking rents are adapting to the realities of weaker demand by tenants. Manhattan’s average asking rent has declined by almost 18% from its peak in the second quarter of 2008.
There also has been a downward trend in landlord ‘effective rents’, which is the net rent the landlord receives after paying for tenant concessions such as construction of the tenants office space and free rent. This suggests that asking rents will continue to decline during the second and third quarters.
As in previous down cycles, the substantial increase in the amount of sublease space available from tenants places strong downward pressure on office rents. Sublease space is typically priced less than direct space, since the lease term is usually just 1 to 4 years and is offered with only minor alterations to the existing layout. Currently the sublease inventory accounts for 25% of all available space in Manhattan, up from well under 20% in the first half of 2008. In the Midtown North sub-market (42nd to 57th street), 30% of all available space falls into the sublease category.
What is interesting about this recessionary period is that in prior downturns the Midtown North market was less affected than either the Midtown South or Downtown markets. This time, however, the Midtown North market is leading the decline in rents. This suggests that rents in the Midtown North sub-market were artificially driven up in recent years.
Going forward, signs of some reduction in available space, increased rental activity and sustained or increasing rent levels will be good indicators that the deterioration in the market has stopped and consolidation has finally begun.
Peter Shakalis is a Director at
FirstService Williams Real Estate
pshakalis@fswre.com
