Number of blocks of space in Midtown with dramatic rent cuts quadruples
Asking rent reductions that accelerated through the fourth quarter of 2008 continued in January, with prices down by as much as 30 percent from the peak last summer, commercial brokers said.
The number of blocks of space in Midtown with dramatic price cuts quadrupled between September and December, according to a CB Richard Ellis report released last month.
Tenant representative broker Norman Bobrow said he saw repricing all over Manhattan. "This has been going on since September of last year but has accelerated, really accelerated, in December and January," he said. He estimated prices had fallen back to levels last seen in 2005.
The optimism from the inauguration of President Barack Obama on Jan. 20 was quickly dampened two days later by a crushing jobs report that showed the city shed 8,500 private jobs in December and the unemployment rate rose to 7.4 percent, Glenn Markman, executive director at Cushman & Wakefield, said. Each office job loss equates to a loss in demand for about 250 square feet.
Despite the bad news, leasing negotiations have picked up from the near standstill in the fourth quarter of 2008.
"The market had to reduce [prices] because it was too expensive," said Markman, who estimated prices were off 20 to 30 percent from last year's highs.
As an example, he said, in late January he was negotiating a lease with a landlord in a Midtown building who had been seeking as much as $80 per square foot. The tenant occupies the space on a sublease, paying about $50 per foot. But as the economy declined, the landlord reconsidered its high price and will likely settle for about $55 per square foot, or a 31 percent cut from the asking price.
"Look what the landlord gets: certainty," Markman said. "He does not give [tenant improvement] or free rent ... and no downtime for leasing."
Howard Rosenblum, a leasing agent and director at commercial property landlord Kaufman Organization, said owners were aggressively cutting prices by about 20 to 25 percent to attract tenants. But, he said, tenants were still holding off.
"A lot of people are thinking it is going to drop more and don't want to commit," he said. Tenants do not want to pay the steep security deposit and some wonder if they will still be in business in the coming years.
But some tenants who do negotiate are signing leases with prices that are below the rents they paid in the final years of a long-term lease, he said.
Neal Lerner, an independent tenant representative broker who works in the 5,000-to-15,000-square-foot range, said tenants willing to sign leases were opting for shorter terms, like two, three or five years. The bet is that rents will be even lower on the expiration of the lease, and they will get a better deal at that time.
"People tend to stay in place and negotiate shorter commitments from landlords," he said. "They are waiting for a better time when they can take advantage of lower rentals on a long-term basis."
Midtown
Landlords in Midtown have tripled the amount of space aggressively discounted in their hunt for tenants, slashing prices in December by an average of 19 percent, CBRE reported. The quantity of sites being repriced quadrupled from 30 in October to 134 in December, representing 1.74 million square feet that month, the report said.
Despite the steep reductions, the average asking rents dropped by only $1.98 to $78.89 in December, and vacancies rose 1 point to 7.6 percent, the data said.
Some landlords were holding firm in pricing. Bobrow said there were Class A landlords in Midtown who were reluctant to sign leases at discounts. The building owners sought to maintain the high rents in the office towers so that larger tenants negotiating a lease renewal could not point to lower rents and ask for a similar discount.
Landlords "don't want to inch down, they want to hold on to the renewals" at the high prices, he said.
Midtown South
Midtown South had its slowest month in leasing velocity since May 2001. Just 80,000 square feet was signed, representing only 20 percent of the five-year rolling average, CBRE said. The anemic month capped the weakest year since 1993. In 2008, 2.58 million square feet was leased, a level 40 percent below the total for 2007, the data showed.
The district saw vacancies rise in December by 1 point over the month earlier to 8 percent, but asking rents remained steady, dropping just $0.03 to $52.43 per square foot.
Downtown
Leasing activity Downtown remained flat while prices declined moderately, in the only one of the three office markets to see positive absorption, the CBRE data showed.
The district had a net absorption of 270,000 square feet, but for the full year the area had a negative absorption of 1.59 million square feet, compared to a positive absorption of 1.33 million square feet in 2007, according to CBRE.
Average asking rents fell from November to December by $1.51 per square foot to $47.68 per foot, while vacancy rates were steady at 7.4 percent.
Markman said brokers were keeping a close eye on three financial firms that occupy 7.5 million square feet downtown — Bank of America, Goldman Sachs and American International Group.
Bank of America is absorbing Merrill Lynch, Goldman Sachs is moving to a new headquarters in 2010 and AIG may sell some of its buildings for residential use.
"Depending on what the companies look like a year from now, that will have an effect on the marketplace," he said.
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