Negative net absorption characterizes Manhattan market - real estate industry statistics - Brief Article - Statistical Data Included

Following a strong year in 2000, the Manhattan office market displayed clear signs of a slowdown during the first half of 2001. For the first time in more than two years, net absorption was negative in Midtown and Downtown. Strong negative net absorption of more than 4 million SF caused the overall vacancy rate to rise to 3.5 percent from 2.2 percent at year-end 2000. This weak performance was felt in nearly all submarkets, but the vast majority of the decline came in the Midtown markets. On a more positive note, several large block availabilities have hit the market allowing tenants, who in the past few years have been forced out of New York City, to accommodate necessary expansion.

The addition of 4.1 million square feet to the Midtown market increased the vacancy rate to 3.6 percent. More astounding, the vacancy including sublets has reached 5.4 percent. Surprisingly, these numbers are lower in Downtown, which recorded a 3.3 percent vacancy rate and a 4.4 percent vacancy rate with sublets. This increased availability stems from two sources: internet and new technology start-ups heading toward bankruptcy continue to dispose of their real estate obligations, and traditional business sectors, who recently leased future expansion space under the influence of a bull market, now explore sublet possibilities.

Despite an increase of available space, rental rates for direct space have remained relatively strong. Annual rent growth, at one time in excess of 20 percent will likely be in the 2 percent to 4 percent range this year. The astronomical rents achieved by landlords are not likely to come down, but their growth will moderate considerably.

Midtown average asking rents are $61.32 per SF, roughly $14 higher than the average rate Downtown, which is $47.34 per SF. During the past three months both markets have experienced a 2 percent decrease in asking rental rates. This slight drop is a result of changing rates on the extreme ends of the spectrum. Downward pressure on rental rates has come from motivated sublessors looking to escape obligations and cut downtime by offering below market rates. In response, landlords have held on to high rental rates for direct space, but continue to offer more concessions to attract tenants searching for space.

In the midst of a slowdown in overall tenant activity, large financial institutions remained active. After being rumored to be in the market for 1 million plus square feet, CIBC World Markets finally committed to 300 Madison Ave., a Brookfield Financial Properties Corp. speculative project. The firm plans to consolidate its four Manhattan locations to this site in 2004. In an assignment from Credit Suisse First Boston, JP Morgan Chase will assume the leasehold of 1.3 million SF at 277 Park Avenue.

The capital markets also experienced uncertainty during the first half of 2001. Although the continued declines in the stock market were countered by several interest rate cuts by the Federal Reserve, investor and consumer confidence reached its lowest point in half a decade. As a result, many investors and capital sources became inactive as a result of the changing market, preferring to wait out the turmoil. Consequently, many transactions did not attract the pricing level anticipated, relatively few transactions closed, and several transactions were withdrawn from the market.

Consistent with the last quarter, the number of investors interested in large transactions declined significantly, due to several reasons: many major German investors withdrew; real estate investment trusts (REITs) had difficulty attracting new capital in the equity markets; and domestic pension funds were over-allocated in office buildings. As a result, buyers with the greatest appetite for large buildings were sated. Accordingly, small transactions drew the most interest, as investors were willing to assume market risk on these less expensive assets.

Capital markets appear to be recovering, if slowly. Although most investors remain cautious, many entrepreneurial investors think that the current market has created an excellent opportunity to find and create value. Additionally, debt capital markets are robust, with abundant debt capital available at attractive pricing. Finally, many debt and equity capital sources have new allocations for office buildings, which will increase liquidity in the market.

Ironically, Manhattan market fundamentals remain stronger than in any other major market in the country. Private employment continues to increase, even in light of reported layoffs and little new construction relative to the market is occurring. The combination of these factors has driven the Manhattan market to current remarkable vacancy and rental rate levels. Even with a slowing economy, these factors are unlikely to change significantly in the near future, and the market fundamentals should remain strong.

Few experts expect the current downturn, whether it is a recession or a mild slowdown, to remain protracted. In fact, after a dismal performance through the twelve months, financial markets are making a comeback. Despite a large absolute employment base, New York's exposure to the tech industry is low in relation to its other industries. This diversity ensures that it will quickly recover from adversity.

The outlook for the remainder of 2001 appears to be a softening market. Tenants will gradually gain increased bargaining power, which marks a change from the landlord's market of 1999 and 2000. Rental rates may decline slightly as available sublease space continues to flood the market. Despite this climate, the scarce supply of new construction deliveries will sustain Manhattan's low vacancy rate.

COPYRIGHT 2001 Hagedorn Publication
COPYRIGHT 2001 Gale Group