market research

January 2010

February 2010 New York Commercial Real Estate Market Report

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Industry executives believe that we are at or near the bottom. The market 12 months ago felt like there was no bottom. Large building sales are starting to get done as sellers acknowledge the new market price. Loans are getting done although at substantially lower debt levels and at more stringent terms. There is still an overhang of zombie residential and commercial buildings where ownership does not have the money to fund build-outs and/or the properties owners have yet to cede ownership to the banks.

The amount of long-term sublease space from the financial service firms is being reduced which means that prices of office space will rise and or concessions will start to abate, as motivated sellers are removed from the market.

Retail will remain in a difficult period until people return to the stores and start buying. Retail prices should continue to moderately(fall) over the next 12 months. This is due to the operating struggling stores closing as they are not generating enough money to stay open and inventory increases.

Food for thought:

Will banks stop pretending and extending and take the losses now that they are profitable?
What will happen to the residential shadow inventory of zombie buildings?
What will happen to the former Goldman Sachs, AIG and Meryl Lynch space downtown?
Will there be more space added as firms restack buildings to consolidate their space holdings?

New York Market Overview

  • Total Manhattan Class A Office vacancies increased from 8.5 % vacant to 8.7 % vacant
  • Total New York City Office vacancy increased from 7.7 % vacant to 7.8 % vacant
Last year was miserable for New York investment sales with below $7 billion in deals for all property types in the metropolitan area, down from $77 billion in 2007 and $26 billion in 2008. The dearth in sales means Manhattan no longer sits as the No. 1 market. It is not even in the top 10 of all property types, down to No. 13.

New leasing activity in Midtown jumped by 34 percent in December from the prior month, ending the year with an annual volume of the 2008 level yet despite the strong leasing levels, average asking rents continued to fall in all Manhattan markets,. The volume of new leasing in Midtown last month was 1.6 million square feet, up from the prior month's level of 1.19 million square feet, and was ahead of the five-year monthly average of 1.23 million square feet. Average asking rents fell by $0.04 per square foot to $56.02 per foot, while in the Park Avenue submarket, average asking rents fell by $2.49 per foot to $60.93 per foot.

While some are bracing for a double dip in the commercial real estate market, there are others who think prices have already stabilized. Many have fears of an even greater commercial fallout. The debt markets were so bad last year that now they are beginning to unlock, and values are going to stabilize.

Whether encouraged by declining asking rents or spurred by demand for office tenants, the difficult year of 2009 finished with a flurry of activity. Yet few believe the market has found a solid footing, as landlords continue to cut asking rents to compete with high unemployment and an uncertain recovery. The big question is how tenants feel about the future. If a tenant feels confident that their business is going to be better five years from now, then they are more likely to want to lock into the cheap rates of today. However, stronger activity in Midtown did not signal that a recovery was at hand.

An economic recovery may happen in 2011, due to an expected bottoming out of the commercial real estate market by the end of the year. It is highly unlikely that commercial real estate losses could hurt the economy as much as the subprime residential mortgage losses have because the value of outstanding commercial mortgages is much less than the value of outstanding residential mortgages. The industrial sector could start to recover in late 2010 because it is less dependent on job growth than the commercial office and retail sectors.
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