Impending layoffs in the financial markets will force the New York property market to cool down for most of 2008 after sustaining growth for the past four years, with overall vacancy rates moving up, according to a report by a property consultancy.
Colliers ABR has forecast a year-end overall vacancy rate in the 8.5 to nine per cent range, up 120 to 170 basis points on the 2007 figure. “The difficulty is in attempting to gauge the severity of the downturn. Layoffs will occur but any New York City-specific announcements have thus far been few and far between. However, we expect more detailed answers as companies release their year-end earnings statements (and forecasts) in the first quarter,” a Colliers analyst said.
Additionally, if any economic improvement is already under way by year-end, the asking rent could once again be heading higher. The report expects overall average asking rent for Manhattan to decline by five per cent from current $64.64 (Dh237.23) per square foot in 2008. Vacancy rates will however remain quite low in Manhattan, as no overbuilding has been done in the recent up cycle.
The Manhattan commercial real estate market closed 2007 in solid shape with a Class A vacancy rate of 5.3 per cent and a record high average asking rent of $85.69 per sq ft. The market pulled back slightly towards the end of the year, with the Class A vacancy rate jumping from its post-September 11 low of 5.1 per cent set in August 2007.
Sublease space, which generally increases in tandem with layoffs, continued to fall through December. In the first 11 months of 2007, layoffs were slow to darken the New York City employment picture. However, job losses (whether layoffs or attrition) did begin to appear late in the fourth quarter with seasonally adjusted private sector positions slipping by 2,200. Both banking and securities saw their employment numbers drop by 700 and 3,700, respectively.
“The difficulty going forward, though, is in forecasting exactly how many jobs will be lost in 2008. We currently expect between 25,000 and 50,000 office layoffs for the year (in Manhattan), which could result in a net job loss for the overall private sector for NYC (office and non-office),” the report said.
In a worst-case scenario, if each layoff resulted in 250 sq ft per employee returned to the market, then a loss of 50,000 jobs could add roughly 12.5 million sq ft to availability and raise the overall vacancy rate, now at 7.3 per cent, to approximately 10.2 per cent.
However, Colliers expects this as a highly unlikely scenario because most financial firms (and economists) expect the unavoidable downturn/recession as shallow and short-lived, lasting not more than three to four quarters. “The expected brevity of the situation dissuades firms from placing sublease space on the market due to costs associated with leasing space again when the economy improves. Of course, additional space (direct or sublease) added to this currently tight market has its benefits too. For present and potential tenants it would hold prices flat or even lower them. While landlords prefer rents to rise, market stabilisation could keep wary tenants from relocating or expanding outside the city,” Colliers said.
The size of the impact layoffs will have on the New York market will become clearer by the end of the first quarter, as financial services companies are expected to announce specific employment plans.
In the meantime, a tangible number of big blocks of space (100,000 sq ft or greater) will, for a variety of reasons, enter availability this year. These figures could move higher depending on the layoff situation. Although occupancy of these blocks may be well into the future, some spaces are already being marketed and perused by potential market tenants (well in advance of need as lead time can be great when one is considering 100,000 sq ft or more).
“An interesting scenario developed in the last half of 2007 in Manhattan: an emboldened Downtown struck back after many years of being somewhat ignored in favour of Midtown,” the Colliers report said.
“Pricing certainly was partially responsible, as a number of Midtown firms took advantage of Downtown’s Class A average asking rent of $54.42 per sq ft compared to Midtown’s average of $95.04. However, there also appeared to be a renewed desire to be a part of the renaissance well under way in Lower Manhattan with its continually improving infrastructure, new retail (luxury and basic) and residential projects sprouting from Water Street to Battery Park City.”
Firms that relocated were mainly financial and legal, but broadcast/media and advertising came too, helping to broaden the Downtown tenant base. As this was taking place, the Downtown Class A vacancy rate managed to slide to 3.9 per cent, well below the 5.8 per cent of Midtown and its lowest level since the 3.8 per cent in February 2001.
Downtown Class A inventory is only 55.6m sq ft versus the 158.1m sq ft of Midtown, which faces challenges. Goldman Sachs will relocate to Battery Park City in 2009 to its new tower, potentially vacating several other Downtown locations, as well as the construction of 8.8m sq ft of commercial space at the World Trade Centre site in 2012-2013. “Regardless, we see the Downtown market as healthy and getting healthier in the long run, especially if the price differential remains significant,” Colliers said. “But Midtown is definitely not down and not out. Many firms will want or need to be in what they consider the heart of Manhattan. Pricing will be a challenge for some, but for those companies, Class B space or slightly offbeat locations such as Penn/Garment might be the answer.”
Jersey loses out
The Class A vacancy rate for Jersey City fell for the fifth quarter in a row, closing the year at 11.8 per cent, down 80 basis points from September’s 12.6 per cent. This is also the lowest it has been since the 11.3 per cent of June 2004. Sublease space continues to decline, closing at just over 700,000 sq ft, its lowest point since 2001.
The Class A average asking rent continued to climb above $30 per sq ft in the fourth quarter, closing December at $32.01 per sq ft, up 4.4 per cent from $30.67 in September. This is its highest figure since $32.56 in March 2002. Westchester County saw improvement in Class A vacancy in the fourth quarter, continuing a trend that began in June. At 20.2 per cent, the vacancy rate was the lowest in a year, though still way above the 13.8 per cent posted in June 2005. The Class A average asking rent in December was $30.55 per sq ft, up slightly from $29.44 in September.
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