11/21/08

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Wall Street woes expected to increase available space

Real estate analysts expect the fallout from last month's turmoil on Wall Street to spark an increase in the availability rate for office space.

Layoffs from the bankruptcy of Lehman Brothers, the sale of Merrill Lynch to Bank of America and the government takeover of American International Group should create another 3 to 4 million square feet in availability, said Steven Coutts, senior vice president of national research services at commercial brokerage Studley.

He predicted the availability rate in Manhattan would rise from about 9 percent in the third quarter of 2008 to about 13 percent at the end of next year as approximately 6 to 8 million square feet becomes available due to additional job losses in the city. One year ago the availability rate stood at 7 percent, he said.

"The financial sector employment will have a ripple effect on the overall employment," he said, which in turn will lead to more sublease space.

Susan Smith, director of the real estate advisory group at PricewaterhouseCoopers, did not see availabilities rising so dramatically.

"Is this going to put a huge hole in the market? I doubt it. It is going to give tenants more options," she said. "Even though the next 12 to 15 months might be choppy and vacancies rise, I don't see that as a long-term trend."

The most recent leasing data available from CB Richard Ellis covers August, predating the Wall Street crisis. But that month the market showed signs of continued weakening.

Leasing activity in Manhattan was 1.06 million square feet, down from 1.65 million the previous month and less than half the figure from the same month a year prior. Vacancies remained flat at 5.8 percent, compared with 4.4 percent last August.

The average asking rent dipped slightly to $71.56 from $71.92 per square foot the month prior, but was still up compared to $64.29 per square foot a year ago, CBRE data showed.

Lehman Brothers and Merrill Lynch each occupy about 3 million square feet in Manhattan, and AIG occupies about 4 million square feet. It has not been clear how much space each will need going forward, experts said, making predictions difficult.

Daniel Blanco, principal of Broad Street Development, expected 2.5 to 3 million square feet of space from those firms to return to the market.

But he saw strength in the older, Class B office market.

"Historically, tenants ranging between 5,000 to 10,000 square feet have been instrumental in driving this end of the market," he said.

Midtown

About 40 percent of Midtown Class A buildings are occupied by financial firms, and asking rents in that group fell by 3.6 percent, Coutts said. He attributed the drop to the return of Class A sublease space to the market.

"The sublease space is having a downward pressure on the rents," he said.

Midtown leasing activity in August was about half the monthly average over the past five years, but absorption remained positive because so little space was returned to the market, according to CBRE. The total for the year so far was 8.97 million feet, 11 percent below the same point last year, which had seen 10.06 million feet leased, the data showed.

The spread between direct and sublease asking rents continued to widen, according to CBRE data. The overall average asking price stood at $86.08, but asking rents for subleases fell to $72.15. Sublease asking rents have been on the decline since early 2007.

The Midtown vacancy rate was 5.2 percent, flat from the month prior, and up from a year ago when the rate was 4.1 percent. Average asking rents in Midtown dipped by $.30 from the month prior, CBRE data showed.

Midtown South

Asking sublease rents remained above direct asking rents in Midtown South, the only submarket where that was the case. Overall rents in August were $53.37, while sublease rents were $55.15. At the same point a year ago direct rents were $45.99, according to CBRE data.

The vacancy rate in the market stood at 6.3 percent, up 0.3 points from the prior month and up significantly from the rate a year ago when it was just 4 percent, the data indicated.

The Midtown South district should remain protected from the layoffs expected in the financial market because only about 3 percent of firms are finance-related, Coutts said.

"Midtown South is kind of insulated from the mess in the short term because there is not a high percentage of financial firms. It is mostly Class B space," he said.

The average asking rent in the market was $53.37 per foot, up $0.03 from the month before. A year earlier it was $45.99 per square foot, CBRE data indicated.

Downtown

Benjamin Kursman, a partner and leasing specialist at law firm Herrick, Feinstein LLP, said staff reductions would likely follow the reorganizations of Goldman Sachs and Morgan Stanley.

Goldman was already going to return about 3 million square feet of space to the market next year as it moves to a new headquarters at 200 West Street near Vesey Street, according to published reports. 

"In the long run they will grow, but in the short run there could be excess space, which could result in more space coming available in the market," he said.

Leasing Downtown was 71 percent off the five-year average, with the top four deals coming from non-financial firms, CBRE reported. Absorption, too, was negative. The district saw a net increase of 290,000 square feet, much of it due to Dow Jones and Company returning 204,000 square feet in the World Financial Center.

Asking rents remained flat Downtown month over month, at $50.17, compared to the $46.37 at the same point last year. All sectors of the market were higher than in August 2007, except the World Financial Center, which saw asking rents fall $4.48 to $68.97.