Business & Commercial Listings Sales Guide

Available Sublease Space In Manhattan Approaches Five-Year High

By Cushman & Wakefield

Sublease space accounts for 27.6% of available Manhattan office space Increased leasing activity buoys Downtown office market in first quarter ‘09

NEW YORK – April 7, 2009 – Cushman & Wakefield
today released its first quarter report for the Manhattan commercial real estate market showing the amount of available sublease space is near a five-year high. Sublease space in Manhattan more than doubled from this time last year, reaching 10.3 million square feet at the end of the first quarter of 2009, up from 4.4 million square feet at the end of the first quarter of 2008. The amount of available sublease space is at the highest level since the second quarter of 2004, when 10.9 million square feet of sublease space was available.

The rise in sublease space was a major factor in pushing the overall vacancy rate for Manhattan up to 9.6 percent, a 3.5 percentage point increase from 6.1 percent at this time last year, and the highest level since the third quarter of 2005. Cushman & Wakefield’s vacancy rate reflects space available now or in the next six months. Taking into account space available within the next 12 months, the rate rises to 10.5 percent.

“In the first three months of this year, we saw office tenants bring their space back to the market at an increasing rate,” said Joseph Harbert, chief operating officer of Cushman & Wakefield’s New York Metro Region. “Many Manhattan businesses have been affected by the recession, and are lowering occupancy to help reduce expenses.”

At the end of the first quarter of 2009, available sublease space accounted for 27.6 percent of all available space in Manhattan, compared to 18.6 percent at this time last year, and 37.8 percent during the 2002 recession. According to Mr. Harbert, this rise in sublease space has put substantial downward pressure on asking rents, as companies seek to dispose of excess space at a discount compared to direct space available from landlords.

The direct vacancy rate in Manhattan reached 6.9 percent at the end of the first quarter of 2009, up from 5.0 percent at this time last year, but still below the 9.2 percent peak in 2004.

“Landlords are still benefiting from a relatively healthy occupancy rate, but well-priced sublease space is creating competition and pushing down rents for direct space as well, as landlords compete for tenants,” said Mr. Harbert.

Total available space in Manhattan reached 37.5 million square feet at the end of the first quarter of 2009, the highest level since the third quarter of 2005, when it was 37.5 million square feet. The increase represented a 56.4 percent rise in available space from 24 million square feet at this time last year. Available space increased in all of the three submarkets of Midtown, Midtown South and Downtown, with Midtown recording the largest year-over-year increase, up 22.8 percent from 14.3 million available square feet at this time last year, to 25.2 million square feet at the end of the first quarter of 2009.

Overall year-to-date leasing activity for Manhattan totaled only 3 million square feet at the end of the first quarter of 2009, making it the least-active first quarter on record. Overall leasing activity was down 39 percent from last year’s first quarter total of 5 million square feet. While year-to-date leasing activity was down 51.4 percent year-over-year in Midtown and down 35.1 percent year-over-year in Midtown South, Downtown leasing activity increased by 18.7 percent from this time last year, ending the first quarter of 2009 with 920,395 square feet of new leasing activity.

Downtown was also the only submarket to chart a vacancy rate increase of less than 1 percentage point, ending the first quarter of 2009 with a 8.1 percent vacancy rate, up 0.8 percentage points from this time last year. Midtown’s vacancy rate reached 10.5 percent, up from 6.0 percent at this time last year, and Midtown South’s vacancy rate reached 8.1 percent, up from 5.0 percent at this time last year.

“Downtown held its own during the first quarter,” said Mr. Harbert. “We see this as a testament to Downtown’s diversification in recent years, as it has become more appealing to tenants outside of the financial services industry.”

All three submarkets also recorded negative absorption, or more space put back onto the market than the amount of space taken off.

Total absorption for Manhattan at the end of the first quarter of 2009 was negative 7.5 million square feet, compared to negative 2.1 million square feet at this time last year.

Overall asking rents for Manhattan fell to $65.01 per square foot, a 6 percent or $4.43 decline from $69.44 per square foot at the end of 2008, the largest quarter-over-quarter decline on record. At the end of the first quarter of 2009, direct asking rents were $67.98 per square foot, a 6 percent or $4.10 decline from the end of 2008, while sublease asking rents were $56.25 per square foot, an 8 percent or $4.97 decline from the end of 2008.

“In a post-Lehman economic environment, it is not a surprise that on a percentage basis we’ve seen such a sharp drop in rents,” said Mr. Harbert. “We had an unprecedented rise in rents from 2005 to2008. Now sublease space is on the rise, tenant demand has decreased and landlords are becoming more competitive to attract new tenants and retain current ones. The net result is rents falling faster than they did in the last two recessions.”

Available class-A space in Manhattan increased 75 percent year-over-year, with more than 24.5 million square feet of prime office space available at the end of the first quarter of 2009. Class-A vacancies rose to 10.3 percent, the highest level since the first quarter of 2005, and class-A rents declined by 8 percent from the end of 2008 to $74.27 per square foot. Class-A asking rents are down 13 percent since the $85.54-per-square-foot peak in the third quarter of 2008.

“As pricing for class-A space declines, we’ll see a flight to quality as tenants take this opportunity to trade up to newer, more modern space in better buildings,” said Mr. Harbert.

INVESTMENT SALES
First quarter investment sales activity for transactions $10 million and higher totaled $1.1 billion, after $19.2 billion in sales were closed in all of 2008. While $1.6 billion in sales were closed in the first quarter of 2008, at the time there was $3.5 billion in sales under contract, compared to current estimates of less than $100 million in properties currently under contract. Fifteen deals were closed in the first quarter of 2009, compared to 25 in the first quarter of 2008.

The top two transactions, which included the sale of the office condominium at 1540 Broadway and the sale-leaseback of the New York Times building, were also the only two major class-A office transactions to date.

While velocity has been minimal, Mr. Harbert pointed out that the good news is that we are starting to see some activity, and that in a market as large as Manhattan, a period of such low activity will not be sustained for long. Properties recently brought to market, including 70 Pine Street and the UCC foreclosure sale at 1330 Sixth Ave., are expected to garner attention.

“While the majority of investors circling the New York market may be in a holding pattern, there are equity players who want to participate in the market now,” said Mr. Harbert. “The larger issues are the ability to obtain debt financing and the fact that there is a lack of availability. It will take some time for owners and lenders to adjust to the new reality of the marketplace.”

Cushman & Wakefield is the world’s largest privately held commercial real estate services firm. Founded in 1917, it has 230 offices in 58 countries and 15,000 employees. The firm represents a diverse customer base ranging from small businesses to Fortune 500 companies. It offers a complete range of services within four primary disciplines: Transaction Services, including tenant and landlord representation in office, industrial and retail real estate; Capital Markets, including property sales, investment management, valuation services, investment banking, debt and equity financing; Client Solutions, including integrated real estate strategies for large corporations and property owners, and Consulting Services, including business and real estate consulting. A recognized leader in global real estate research, the firm publishes a broad array of proprietary reports available on its online Knowledge Center at www.cushmanwakefield.com.