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August 2009

August 2009 » Market Analysis » Market Report

August 2009 New York Commercial Real Estate Market Report

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The lowest rents in 13 years have caused office and retail tenants to enter back into the market and execute leases.

New York Market Overview

  • Total Manhattan Class A Office vacancies increased from 7.8 % vacant to 8.1 % vacant
  • Total New York City Office vacancy increased from 7.2 % vacant to 7.4 % vacant
This year, leasing activity in Manhattan will likely be the weakest in decades. Expectation is this is going to be the worst year since keeping records on this in the 1980. There has only been 5.9 million square feet leased in Manhattan through July 1, and expects leasing for the year to be worse than the most recent low of 14 million square feet in 1991.

Available office space rose to 41.2 million square feet, the highest level in the past four and a half years. The availability rate reached 11.5 percent, up from 10.5 percent at the end of first-quarter 2009. Asking rents also showed weakness. They fell in Manhattan, dropping 7.4 percent to $60.23 per square foot from $65.01 per foot in the first quarter of the year. The market showed improvement in June, with 1.7 million square feet leased in Manhattan, up from 805,000 square feet leased in May.

While the entire commercial real estate scene is struggling, not the entire struggle is created equally. Some of it is coming in the form of giant chunks of empty space, the likes of which have not been seen in Manhattan for decades. Whether through relocations, downsizing or bankruptcies, huge swaths of office space on single city blocks remain unoccupied, creating in some instances, the urban equivalent of massive dead zones. And the amount of available space is staggering. The volatile commercial real estate market is raising serious questions about the future of real estate investment trusts. Available office space rose to 41.2 million square feet in the second quarter of this year, the highest level in the past four and a half years, Goldman Sachs saw a $700 million loss in commercial mortgage loans and a $500 million loss in real estate principal investments over the last two years. With office rents already at a dismal $60.23 per square foot, these rent values could drop further.

In a worst-case scenario, office vacancy rates which now stand at 10.5 percent, would hit 17 percent if an additional 125,000 office workers in New York City were laid off. Those losses would be in addition to the 60,000 jobs that have already been cut. A less dire scenario in which 40,000 additional workers were laid off would send the vacancy rate to 13.2 percent. The investment sales market total volume was just $1.8 billion, down 95 percent from the peak in 2007, and down 90 percent from the average from 2004 to 2008. The top building sales which closed this year were Worldwide Plaza at 825 Eighth Avenue for $605 million, and 1540 Broadway for $355 million. The global recession and the credit crisis are having an effect on new hotel construction throughout the U.S., especially in New York City. Total projects under construction in the U.S. have fallen 20.1 percent since last year, with a corresponding 27.2 percent drop in the number of rooms.

The U.S. office vacancy rate increased to 15.9 percent during the second quarter, the highest level in four years. Vacancies hit 16 percent in the first quarter of 2005, and were at 15.2 percent in the first quarter of this year. The demand for offices slid for a sixth consecutive quarter, and the amount of occupied space fell by 45.2 million square feet so far this year. It will grow to 67.6 million feet by the end of the year.

While the downturn has led to cheaper rents for office tenants, the decline in expenses is clearly not enough to prevent some companies from going out of business and vacating their spaces before their leases expire. Those early move-outs are now testing some lease provisions, called "good-guy guarantees," which were designed to avoid bitter disputes in landlord-tenant court, but were written during more plentiful times. While overall office asking rents in Manhattan are off 24 percent from their peak of $71.92 per square foot in July 2008 (down to an average of $54.63 this past May), some failing businesses cannot take advantage of the discounts. As a result, they have begun exercising their good-guy guarantees.

Rents on some of the city's most prestigious shopping corridors have fallen by nearly a third over the last year. The sharpest drop was on Madison Avenue from 57th to 72nd streets, where average asking rents for first-floor retail fell 31 percent in the second quarter of the year to $745 per square foot from $1,091 per square foot. At the same time, the availability rate grew from 13.4 percent to 15.47 percent. While the rents in most of the six shopping districts covered declined, one area, Times Square from Eighth Avenue to Broadway and 42nd to 49th streets, saw an increase in average rents from last year.

Storefront vacancy in Manhattan is at 6.5 percent, the highest level since the early 1990s. One in 10 small In response to the plight of small businesses in Manhattan, the city is considering a Small Business Survival Act, which would give businesses the option of 10-year leases, renewals and the right to mediation if they cannot reach lease agreements. But the Bloomberg administration has not supported the act, stating that tracking lease negotiations would be too costly. However, storefronts in neighborhoods with steady foot traffic from tourists, such as Times Square, have not seen as many closings.

Real estate prices in the Flatiron District began falling in 2008, and transaction volume has plunged over the last six months. For the majority of the last seven years, the average price per square foot in the Flatiron District ranged from about $250 to $350 per square foot. The average price per square foot for office buildings in the neighborhood peaked at $600 per square foot in 2007. One of the few commercial transactions of this year in the Flatiron District took place when Sorgente Group purchased more than 50 percent stake in the Flatiron Building at 23rd Street and Fifth Avenue. The company plans to turn the building into a hotel.

Rents on some of the city's most prestigious shopping corridors have fallen by nearly a third over the last year, second-quarter. The sharpest drop was seen on Madison Avenue from 57th to 72nd streets, where average asking rents for first-floor retail fell 31 percent in the second quarter of the year to $745 per square foot from $1,091 per square foot. At the same time, the availability rate grew from 13.4 percent to 15.47 percent. While the rents in most of the six shopping districts covered in the survey declined, one area, Times Square from Eighth Avenue to Broadway and 42nd to 49th streets, saw an increase in average rents from last year.
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