Available Office Space Reaches Four-Year High
14 Jul, 2009, New York
Cushman & Wakefield today released its midyear report for the Manhattan commercial real estate market showing that the rate at which office space was put back onto the market slowed during the second quarter of 2009.
Total available space in Manhattan reached 41.2 million square feet, the highest level in four-and-a-half years. However, during the second quarter of 2009, 3.7 million square feet of space was added back to the market, about two million square feet less than the 5.7 million square feet added back to the market during the first quarter of 2009.
“While we do not expect to see the end of increased availability and declining rents, our midyear statistics certainly give us some optimism that the worst is behind us, as the pace of deterioration has slowed,” said Joseph Harbert, chief operating officer of Cushman & Wakefield’s New York Metro Region.
Overall leasing activity remained low, totaling 6.3 million square feet at midyear 2009. While monthly leasing activity was slow during the first two months of the quarter, June leasing activity, which totaled 1.7 million square feet, surpassed April and May combined, at 738,000 square feet and 805,000 square feet, respectively. June was the most active month of the quarter for all three submarkets of Midtown, Midtown South and Downtown. Midtown, in particular, buoyed June 2009 activity, with 1.4 million square feet of leasing activity, up 40.0 percent from the one million square feet leased in Midtown during June 2008.
With leasing activity levels up in June and less space being added to the market, increases in vacancy also began to slow. Manhattan’s overall vacancy rate at midyear 2009, which includes space available within the next six months, held steady from the previous month at 10.5 percent, the first time there was no month-over-month increase since February 2008. The overall vacancy rate increased 0.9 percentage points during the second quarter, compared to a 1.6 percentage point increase during the first quarter. Manhattan’s overall availability rate, which includes space available within the next 12 months, increased to 11.5 percent at midyear 2009, up from 10.5 percent at the end of the first quarter of 2009.
The average asking rent for Manhattan office space declined to $60.23 per square foot at midyear 2009, down 7.4 percent from $65.01 per square foot at the end of the first quarter 2009, and down 15.9 percent from $71.59 per square foot at midyear 2008. Average asking rents in Midtown, Manhattan’s largest and most expensive office submarket, were down 20.4 percent from $83.96 per square foot at midyear 2008 to $66.82 per square foot at midyear 2009. Net effective rents, which include the addition of tenant improvement allowances and other concessions, slid even further during the second quarter.
As average asking rents for office space in Manhattan continued to fall, the spread between asking rents for direct space and sublease space increased dramatically from the previous year. In Midtown Manhattan, there was a $12.12 per-square-foot difference between direct and sublease asking rents at midyear 2009, more than four times the $2.67 per-square-foot difference at midyear 2008.
“Though many owners have cut prices for direct space, heavily discounted sublease space has created a considerable differential between the costs of direct space and sublease space,” said Mr. Harbert. “When combined with the relatively low leasing velocity, the sublease space will continue to put pressure on both asking and taking rents.”
Property sales closed and under contract for transactions priced $10 million and higher totaled $2.5 billion at midyear 2009, compared to $13.8 billion at this time last year. Approximately $1.7 billion in sales closed during the first half of 2009, compared to $7.2 billion during the first half of 2008.
Though no large new sales were completed during the second quarter of 2009, two major properties were put under contract for sale. Both 70 Pine Street, under contract for approximately $110 million, and Worldwide Plaza, under contract for approximately $605 million, are expected to close during the third quarter.
“We expect to see additional properties brought to market as more owners and lenders will be dealing with the realities of their real estate holdings,” said Mr. Harbert. “While sales volume is down considerably, each new transaction helps to establish where the market is in terms of value, which is beneficial for both buyers and sellers.”
Pricing for major properties that have either closed or gone to contract year-to-date represent more than a 60 percent decline from peak 2007 prices.
Despite limited activity, there are investors that want to participate in the property sales market, either now or in the near term, according to Mr. Harbert.
“Each month we’ve seen an increase in investor interest and much of this interest is from foreign investors, including private capital from China, Russia, Korea, the Middle East, Latin America and other regions,” said Mr. Harbert. “While debt liquidity is a major roadblock to unlocking the investment market, equally significant is the lack of product available from sellers that will meet the market.”
Limited leasing activity resulted in little material change in Manhattan’s retail real estate market during the second quarter of 2009.
“While there have not been improvements in Manhattan’s retail real estate market, we haven’t seen market deterioration either,” said Mr. Harbert. “The prime markets are holding steady from where they were at the end of last quarter. There is not much new availability, but at the same time, we are not seeing much absorption.”
In Soho, availability – which not only includes vacant space, but also spaces that are occupied and will soon become available – increased slightly to 10.5 percent, up from 9.2 percent at the end of the first quarter. Average asking rents for ground floor space were $237 per square foot at midyear 2009, down 1.6 percent, or $4.00, from first quarter 2009.
On the stretch of Fifth Avenue from 42nd to 49th Streets, midyear availability remained at 15.3 percent – flat from the end of the first quarter of 2009. On the upper stretch of Fifth Avenue, ranging from 49th to 60th Streets, availably declined to 3.3 percent from 6.5 percent at the end of the first quarter, as Swarovski subleased the former Sergio Rossi space at 694 Fifth Ave. A portion of the retail space at 666 Fifth Ave. remains the only immediately available retail space on Manhattan’s most expensive retail corridor.
Four available spaces were leased during the second quarter of 2009 in the Times Square submarket, which spans from Eighth Avenue to Broadway and from 42nd Street to 49th Street. This activity, which included European retailer Inglot’s lease for its first U.S. store at 1592 Broadway, brought Times Square’s availability rate down to 10.0 percent at midyear, from 12.6 percent at the end of the first quarter.
“While there are retailers actively looking to either expand or create a presence in the Manhattan market, negotiations are drawn out and few deals are actually getting done,” said Mr. Harbert.
The Madison Avenue submarket experienced declines in average ground floor asking rents and an increase in availability. Asking rents fell 21 percent quarter-over-quarter, reaching $745 per square foot at midyear 2009. Availability on the stretch of Madison Avenue from 57th to 72nd Streets increased 2.5 percentage points from the end of the first quarter, to 15.4 percent at midyear 2009.
“As a luxury-focused submarket, Madison Avenue was the first Manhattan retail submarket to feel the effects of the recession,” said Mr. Harbert. “Based upon the current availability rate and asking rents reflecting market conditions, we expect retailers to begin to take advantage of market opportunities that have not been present on Madison Avenue in several years.”
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