As Office Rates Sag in Manhattan, Tenants Gaining Upper Hand

With the industry’s current struggles dragging down office leasing rates in even normally robust Manhattan, tenants are finding that for the first time in a long while, the balance of power is tipping in their favor. According to a fourth quarter 2008 Grubb & Ellis Co. report. Class A direct average asking rents for Manhattan were down 2.5 percent in 2008 as compared to 2007, a $2.26 drop to $86.80 per square foot to end the year, the report said. In spite of the minimal decline in asking rents, landlords have discounted rents more precipitously. In 2007, landlords were completing transactions 1 to 3 percent off their asking price. That changed, however, in the second half of 2008, as taking rents were discounted 10 to 15 percent off the asking rents, with some exceptions reaching as high as 20 percent. In 2009, expect that differential to widen further as demand for space remains tepid and landlords begin to compete for tenants with space requirements, according to the Grubb & Ellis report. The Manhattan vacancy rate rose throughout the past year, reaching 6.6 percent in the fourth quarter, up from 4.5 percent at the end of 2007. Meanwhile, the availability rate, defined as space that is available for occupancy within the next 12 months, grew further in 2008 to 11.6 percent, up from 7.7 percent in 2007, according to the figures. Companies like architectural firm Skidmore, Owings & Merrill L.L.P. are reaping the benefits of the downward pressure on rental rates. The firm just renewed its lease for 65,400 square feet at the 37-story Class A Downtown high rise, 14 Wall Street. In a prepared statement, Studley president Michael Colacino, who represented Skidmore in the deal, said in today’s real estate market, there is no shortage of options for tenants that either have to make a deal because of an expiring lease or that have the confidence to lock in lower occupancy costs for the long term. The Skidmore agreement included an ample concession package and expansion options that will enable the firm to remain in this location for many years to come. The building ownership, a joint venture with Capstone Equities and the Carlyle Group, was represented by CB Richard Ellis Inc. in the negotiations. Skidmore’s good fortune is a prime example of tenants who may be faced with leases expiring in the next 12 to 36 months who now have the luxury of an abundance of available supply to choose from. The Grubb & Ellis report stated that firms like those should be able to negotiate transactions that suit their real estate needs. On the other hand, savvy landlords that will face leases rolling within their portfolios could likely offer generous renewal packages for tenants to keep their occupancy levels high, the report added.