By Peter Shakalis
The availability rate (the amount of space that is available for lease as a percentage of the total space in Manhattan) pushed a little higher as the year ended, rising from 13.4 percent in the third quarter to 13.8 percent in the fourth quarter.
This uptick in available space was partially a result of some of the stronger financial institutions finally placing space on the market that had been superfluous for well over a year. Additionally, Goldman Sachs’ new headquarters building creates nearly two million square feet of additional office space in the Downtown market. The fact that the availability rate rose so modestly in the fourth quarter however is a testament to the market’s robustness.
FirstService Williams preliminary analysis of rent trends shows that landlord concession packages (free rent and construction allowance that landlords give to tenants as an incentive to lease space) in at least some situations were not as large as they had been in the second or third quarters. While the average asking rent declined slightly, landlord net effective rents, (the landlords net rent after its cost for these concessions) seem to have stabilized.
With growth outside the US on average remaining strong, the reasonable expectation is that New York should experience continued expansion in 2010 and beyond. Additionally, in spite of the weak prospects for employment growth across the U.S., the national economy recorded 2 percent GDP growth in the third quarter and expanded at a 5.7 percent annual rate in the fourth quarter. Solid economic growth in the past has eventually brought higher corporate profits and employment gains; the fundamental drivers of the demand for office space.
There is hesitancy in the property markets however that indicates that many people do not believe that the recovery in 2010 and beyond will be quite so clean and tidy. First, and most obvious, with financing for commercial property still constrained and market values down so much, any refinancing will be difficult and in some cases impossible. This means that more property will be forced onto the distressed sale market, perhaps depressing market values even more.
The secondly, there is a fundamental question of confidence. It still is not clear to many that we understand what went so wrong with the economy to result in such a deep and protracted downturn. If people aren’t confident with the diagnosis, they also can’t have much confidence with the prescribed cure.
As a result, our projection for Manhattan looks for a modest decline in the availability rate to 13.5 percent by the end of 2010 from 14 percent in the early part of the year. Employment in the office sector increases in 2010 by enough to result in the net absorption of 1.25 to 1.75 million square feet. If sentiment about the prospects for the economy improves as 2010 rolls along, the pace of leasing activity could ratchet up again in anticipation of substantially higher staffing levels and upward pressure on rental rates in 2011 and 2012.
Peter Shakalis is a Director at
FirstService Williams Real Estate
pshakalis@fswre.com
The good news at the end of 2009 is that taking rents appeared to be very close to their trough for this cycle, and the level of office leasing activity was approaching the long term average for Manhattan.
