Cracks are starting to appear in office rents
Theresa Agovino
Published: August 27, 2007 - 11:33 am
The credit crunch that is roiling the stock market, paralyzing merger and acquisition deals, and stalling building sales is also slowly chilling Manhattan's hot commercial rental market. The financial services sector--the key driver of lower vacancy rates and higher rents in recent years--accounts for about one third of the space leased in Manhattan. There's now concern that firms will slash staff and relinquish space.
A new sense of caution is already evident. Last week, Lehman Brothers chose not to take an additional 70,000 to 80,000 square feet at 399 Park Ave.
"Wall Street is crucial," says David Hoffman, executive managing director at real estate firm Colliers ABR Inc. "If [Wall Street operations] fire en masse, then so do the lawyers, accountants, advertisers and so on."
Most real estate insiders remain optimistic that the financial crisis will pass quickly. They also argue that the market could withstand a slowdown. Manhattan's office vacancy rate stood at a low 5.3% at the end of the second quarter, according to Cushman & Wakefield Inc., with little new space slated to come online soon.
According to industry benchmarks, more than 40,000 jobs would have to be cut for the vacancy rate to approach 8%, which brokers say is the point at which the playing field begins to level between tenants and landlords.
"There has been no slowdown in leasing activity," says Mitchell Konsker, a vice chairman at Cushman. "There are still multiple tenants [competing] for open spaces." He brokered two deals at a West 27th Street building where rents rose about 22% from June through August, to roughly $44 a square foot.
Low commercial vacancies didn't insulate the real estate market as a recession deepened after Sept. 11, however.
The rate jumped to 12.5% in 2003 from 3.6% in 2000; rents fell 11% during the same time frame.
Most vulnerable to a downturn: those buyers who have paid staggering sums for office towers and need continuing substantial rent increases to be able to refinance or meet their debt obligations.
Harry Macklowe, who recently purchased seven properties from The Blackstone Group for roughly $7 billion, is one such buyer. A spokesman for Mr. Macklowe declined to comment.
Rents in the 12 months that ended June 30 rose 34%, to $63.56 a square foot--the sharpest annual increase in at least two decades, according to CB Richard Ellis Group. But that surge isn't expected to continue.
Mr. Konsker forecasts a rent hike of only 5% to 10% next year.
Mr. Friedman believes rents could decline by at least 10%. "I think people buying at the historical highs could get hurt," he says.
If financial services firms begin to cut staff, they will also start subleasing excess space. Brokers are anxiously following hedge funds, many of which invested heavily in subprime mortgages and could go out of business in the coming months. Even though the fund firms don't lease large blocks of space, their willingness to pay more than $100 a square foot has pushed up prices.
INDUSTRIAL STRENGTH
Sectors leasing the most square feet of office space in Manhattan in first-half 2007.
MIDTOWN
Financial 1,828,141
Law 1,434,382
Other 1,166,515
Entertainment 451,393
Banking 442,210
Hedge funds 428,876
DOWNTOWN
Financial 1,510,239
Other 498,227
Insurance 290,194
Law 143,961
Printing 121,272
Source: CB Richard Ellis
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