Commercial Real Estate:
IN Focus
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Now May be the Time
to Consider Occupancy Needs...
In spite of those who would believe that the real estate office market will do a double dip or revert back to 2009 conditions, the time for commercial office tenants to begin to evaluate occupancy needs and secure long term lease commitments is now.

By Peter Shakalis

While this may appear self serving, the market has opportunities that many in the industry never thought would be available just prior to the melt down of 2008. Today for example, the average effective rent per square foot in Manhattan (adjusting for landlord concessions) is the same as it was in 2000!

Negotiating an attractively priced deal is only part of the benefit in today’s market. Landlords are offering to build out the tenants required office installation, and pre-built office units ready for occupancy are back in vogue, and have been for a while. Office space expansion, contraction and cancellation options within the building are all on the negotiating table. Landlord takeovers of existing tenant obligations, reduced yearly rent escalations, and tenant-friendly sublease clauses are as well.

While the market by most measures is recovering slowly and may take much of 2011 before we see strong sustained growth, many indicators and recent deals suggest that there is positive momentum in the market - that the worst, finally, is past. Increased property sales for example, a good barometer for fundamentals in the market, is poised to double over 2009’s level to over $4 billion in volume while the average sales price per square foot increased to $450 from $333 per square foot in 2009. REITs and foreign buyers are back in the market, accounting for two thirds of all sales in 2010.

Foreclosures of commercial office buildings, which many anticipated, have not materialized. Many banks rather than foreclosing on delinquent loans have instead extended them, thereby not having to write them off at substantial losses which would sully their balance sheets (otherwise known as ‘extend and pretend’). Rather, the decision in many cases has been to hold on and wait for the values to rebound with the market. One result of this policy has been that large funds, both domestic and foreign which were poised to buy distressed property, have very little product available to choose from.

The report on the leasing side is compelling as well. Availability rates (the percentage of vacant space and space that can be made available for lease) are holding steady or declining for the Midtown North, Midtown and Midtown South markets, with Midtown South the strongest at an11.1 percent availability and a vacancy factor of just 5.5 percent. By way of comparison, typically once the availability rate gets below 10 percent, landlords begin to raise rents and cut back on tenant work. While Downtown remains the weakest market, with an availability rate of over 16 percent, the activity level has remained ahead of 2009. With the availability of large blocks of space and competitive prices, many tenants are considering a relocation to this market; Condé Nast; American Media; Bank of America; The Daily News and others.

Alas the one consideration that most affects the market is employment. Thankfully this has remained positive with a total of 53,000 jobs added since the end of 2009. Data now indicates that the stabilization and recovery in the city’s economy has been earlier and more robust than projected last year. In fact the decline in employment has been smaller than in the two previous recessions, and less than the US as a whole.

Unlike last year when short term leases prevailed, now may be the time to take the long view on occupancy needs.

Peter Shakalis is a Director at
FirstService Williams Real Estate


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