To no one's surprise, the first quarter Manhattan office market statistics recorded a sharp erosion in the sector's operating performance. The economy's implosion was the precursor of the property market's weakness. Both employment and corporate profits have declined, reducing the demand for space and the ability to sustain occupancy costs.
Most of the attention on New York City's economy has been focused on the financial sector, with good reason. Direct employment in this industry is 12.5% of total employment, and this sector has provided recently about one-third of the total personal income earned in New York City. In addition, though, the city is the corporate or North American headquarters for many global companies, and the demand for space by these firms has to reflect overall economic trends. During the past year, the U.S. economy lost 5.3 million jobs and corporate profits declined 21.5% as the level of economic activity shrank. In short, fundamentals dictated that office demand would contract.
As the first quarter ended however the picture did begin to improve, although tentatively. There is a rough positive relationship between the ups and downs of the stock market and employment levels in New York City. Typically, employment begins to decline six to nine months after stocks start to fall, and rises about six to twelve months after the stock market establishes a clear upward path. Stocks pushed higher in the first quarter on a surge in volume, so if current levels can be maintained, that would represent a positive sign. In addition, the shift in FASB rules for banks that pull away from the strict adherence of marking assets to current market prices may help stop the downward spiral in the financial sector. This change in the rules that recognizes how illusionary market prices are for some of the banks' assets provides a real positive for the New York City economy and employment.
Even with these glimmers of hope, it will still be some time before demand conditions turn decidedly positive. However, the net impact on performance from demand weakness will be ameliorated by the fact that additions to the supply of office space in the city are being stretched out. The new World Trade Center buildings that were originally scheduled for delivery in the 2011-2012 period may be delayed for at least several years. Near term this depresses employment in the construction industry. Stretching out deliveries, however, will help to stabilize building market values, avoiding additional asset problems among financial institutions.
Peter Shakalis is a Director at
FirstService Williams Real Estate
pshakalis@fswre.com
