market research

November 2009

November 2009 New York Commercial Real Estate Market Report

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Manhattan leasing activity picks up for both Retail and Office.

Additional 500,000 RSF of office vacancies came on the market last month, but Tenants are snapping up office and retail spaces as rents are near a bottom and business prospects are more stable.

New York Market Overview

  • Total Manhattan Class A Office vacancies increased from 8.2 % vacant to 8.4 % vacant
  • Total New York City Office vacancy increased from 7.4 % vacant to 7.6 % vacant

Building sales for the first three quarters of the year are down 92% in Manhattan compared to the same period in 2007. Sales totaled $3.2 billion in the first nine months of 2009, a sharp decline compared to the same time in 2007, when there were $40 billion in investment sales. In the first three quarters of 2008, there were $18 billion in sales. The situation has improved on the building sales front. The number of sales in Manhattan jumped 270 percent in the third quarter of 2009 to $1.2 billion compared to the quarter earlier when there were $338 million in sales. U.S. banks with heavy exposure to commercial property loans have been setting aside only 38 cents in reserves for every $1 in bad commercial real estate loans. Considering defaults on commercial loans are on the rise is a prediction that the default rate will rise to 4.2 percent by the end of this year from 2.88 percent in the third quarter.

A decrease in tenant improvement contributions and a $0.06 decline in asking rents in Midtown is the smallest decline all year. The next move would be that rents find the bottom. The hope is that some time in 2010 we will see some slight growth. Despite an uptick in third-quarter leasing activity, 2009 would end up at about 16 million square feet leased, or about 10 million square feet. This would make it the weakest leasing year in about 13 years.

U.S. banks are slow to absorb losses from commercial real estate loans. The Federal Reserve officials may soon begin preparing for another real estate collapse, this time in the commercial sector. Banks are slow to absorb commercial real estate losses because of their capital preservation concerns. Especially troublesome are the interest-only loans, which require buyers to repay interest but no principal.

Steadier leasing volume, declines in availability rates and even increases in asking rents for some segments might appear to strengthen building owner, but there is still too much product, and too few tenants.

Overall, office vacancy rate has reached a five-year high. Vacancies reached 11.1 percent by the end of third-quarter 2009, marking a 0.6 percent increase from a quarter earlier. The amount of space leased year-to-date totaled 11.3 million square feet, down 27.8 percent from the same time last year when leasing volume was 15.7 million square feet. This decline in leasing activity comes as average asking rents dropped to $57.08 per square foot, a 5.2 percent decline from the second quarter. Sublease activity has been increasing throughout the year. The third quarter saw a reduction in inventory to 11.1 million square feet from 11.4 million square feet in second-quarter 2009.

Standard & Poor's may downgrade the commercial real estate debt backed by four hotels, including the Four Seasons in New York. The TY Warner Hotels & Resorts properties recorded a 46 percent drop in net cash and have since been placed on credit watch with negative implications. Their $425 million loan is scheduled to mature in January 2010 and has a one-year extension option, for which it will not qualify before clearing a debt-service-coverage hurdle. The decrease in cash flow at the Four Seasons and other luxury hotels could be attributable to an 11 percent drop in occupancy rates for the year ended in 2008.

The pace of delinquencies on commercial mortgages continues to rise at an accelerated pace, expanding 60 basis points to 4.7 percent in the third quarter. The number is double what it was a year ago, but below the third-quarter 2001 rate of 8 percent. Delinquent commercial and industrial loans rose 50 basis points to 4.2 percent. Delinquent loans shot up by 190 basis points to 18.2 percent for construction lending.

Commercial construction has declined dramatically this year. Non-residential construction spending will hit $6.9 billion this year, marking a 38 percent decline from the 2008 spending, which was $11.1 billion. Even so, spending and employment in the construction industry are likely to stabilize in the next two years. While construction spending in 2009 is expected to reach just $25.8 billion, marking a 20 percent decline from 2008, employment is expected to decline only 8.3 percent this year. Spending is expected to remain steady through 2010 and 2011, reaching $25 billion and $25.6 billion, respectively.

While the rest of Manhattan holds its breath for a commercial market collapse, Lower Manhattan has been experiencing dramatic ups and downs over the last nine years. The market freeze of September 2008 and the devastation of 9/11 led to a preponderance of delayed developments and vacant retail properties rarely seen in other neighborhoods. With more than 200 office buildings containing more than 100 million square feet, Lower Manhattan is the third largest office submarket in the U.S., yet the volume of office building sales has dropped dramatically in 2009, with just one office building sale so far this year. For all of last year, eight buildings sold. During the peak year of 2007, 24 office buildings in the neighborhood were sold.

The Manhattan office market is not looking good. Indices for the borough dropped 22.9 percent between the second quarters of 2008 and 2009. The indices track the price changes of commercial real estate in 10 top U.S. markets. This figure is in line with the 21.2 percent national drop on the same scale, as analysts predict that as much as $700 billion in commercial debt could come due in 2013. While commercial lenders look to foreclosure as an option on distressed properties, it's not a completed deal. If the building is not performing, if it lost a major tenant or rents went down and they can't pay debt service, might foreclose, but these lenders are not going to give away assets for cents on the dollar.
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