This content is from: Home

Taking their time

Skittish New York City landlords remind themselves that the few signs of weakening in today's office market hardly compare to the recession of the early '90s. They're right.

Skittish New York City landlords remind themselves that the few signs of weakening in today's office market hardly compare to the recession of the early '90s. They're right.

By Charles Keenan
July 2001
Institutional Investor Magazine

Skittish New York City landlords remind themselves that the few signs of weakening in today's office market hardly compare to the recession of the early '90s. They're right. But the fact remains that prices for Manhattan commercial space are falling and vacancy rates are rising. For the first time since 1998, more space in Manhattan's three major submarkets (Midtown, Midtown South and Downtown) has become available than is leased. In real estate lingo, the market is suffering from negative absorption.

Trophy properties still command handsome prices - $3.2 billion for the World Trade Center, $725 million for the Citigroup Center - but below that elite group prices have softened. Average asking prices fell in the first quarter in all neighborhoods. In Midtown, prices dropped to $60.84 a square foot, from $61.81 at the end of 2000, according to research by Insignia/ESG, a real estate company in New York.

Although corporate layoffs and dot-com failures have added to the pool of available office space, on the whole supply remains fairly tight. Of the 99 million square feet in downtown Manhattan, for example, a net of 905,000 was placed on the market in the first quarter, according to New York real estate firm Julien J. Studley. This addition raised the vacancy rate to 4.6 percent, up from 3.6 percent at the end of 2000. But the rate is still well below the 9 percent level usually considered equilibrium for the market.

Back in the early 1990s, in contrast, New York faced a huge glut of inventory. In the 1980s tax incentives and loose lending standards sparked a building boom that began to go bust in 1990. Prices plummeted in virtually all markets.

These days, even if tenants jettison as much space as they did between 1990 and 1992 - 15 million square feet - the city's overall vacancy rate would rise to 9.7 percent, estimates Mary Ann Tighe, a vice chairman at Insignia/ESG.

In fact, vacancy rates are roughly back to 1999 levels, says Steven Spinola, president of the Real Estate Board of New York. "If we were in this market without any history of the past year and a half, people would say this is a great market," he says. "So we have come down a bit, but we are still riding high."

If supply gets too tight, industry executives point out, more companies might flee Manhattan for less expensive locations. Says Tighe, "If we had remained at the availability rates we were at in December, we would have begun to see people exit the city."

Still, tenants are taking their time before signing new leases. "Corporations are trying to figure out where they think the economy is going and holding off on their decisions for as long as they can," says Bruce Mosler, president of U.S. operations at Cushman & Wakefield, one of New York's largest real estate brokerages.

Adds Robert Goodman, senior managing director at Julien J. Studley, "I am telling tenants to prepare to make an opportunistic decision."

"Generally, when the music stops," says Robert Selsam, senior vice president at Boston Properties, Mortimer Zuckerman's real estate investment trust, "there are more tenants than there are spaces."

Certainly that has always been a better bet in New York's top buildings, which is why trophy sites are selling at record prices. Case in point: A group led by developer Larry Silverstein agreed in April to take control of the 110-story World Trade Center, the biggest real estate transaction in New York City history. As part of the deal, the seller, Port Authority of New York and New Jersey, will lease the complex for 99 years.

That same month a joint venture of Boston Properties and the Hadars, a New York City real estate clan, closed a deal to buy the 59-story Citigroup Center. Dai-ichi Life Investment Properties sold the building for $725 million, a little more than $450 per square foot.

"The acquisition represents a sizable bet on New York City office rents five to seven years from now, albeit with meaningful downside protection," says a recent report by Green Street Advisors, a Newport Beach, California-based research firm. Green Street notes that the building is now 100 percent leased, which should insulate the new owners from any further softening in the New York City office market.