Balance Tips Toward Tenants in Manhattan: Cushman & Wakefield’s Harbert

Hard numbers are confirming what real estate professionals have suspected for months about the nation’s largest office market. According to Cushman & Wakefield’s third-quarter report, Manhattan is showing the clearest signs yet of softening since the credit crisis began last year. By most measures, the balance of power is finally shifting away from landlords. “If you’re a tenant, it’s a good time to be out there,” said Joseph Harbert (pictured), COO for the firm’s New York City metropolitan region, at a briefing this morning. “If you’re a credit tenant, it’s a great time to be out there.” Vacancy in all office classes ticked up to 7.4 percent in the third quarter, from 5.7 percent only a year ago. By the end of this year or early 2009, vacancy in Manhattan could hit 9 or 10 percent, Harbert estimated. Plenty of other indicators underscore Harbert’s point. Leasing activity for all Manhattan submarkets has dropped 14.4 percent so far this year compared to the first three quarters of 2007. Negative absorption at the end of the third quarter reached 2.9 million square feet, dwarfing last year’s third-quarter total of 468,091 square feet. Available sublease space also took a huge jump, hitting 6.5 million square feet at the end of the third quarter–the highest total in three years. And many more big blocks of space are available–83 blocks larger than 50,000 square feet were on the market by the end of the third quarter, up from 60 a year ago. Financial services firms help anchor the Manhattan office market, but the economic slowdown is taking a toll. Even though financial companies were still the single most active category of tenants in the leasing market, their share of new leasing slipped from 35.6 percent during the third quarter of 2007 to just 19 percent last quarter. Office-sector employment in Manhattan sustained a net loss of 3,800 jobs through the first eight months of the year, The financial services sector shed about 10,000 jobs between March through August, a number that will only increase as the shock waves from the industry’s crisis spread. Manhattan rents tell a complex story. Rents continued to edge up from mid-year, increasing $1.38 per square foot to $72.97 overall during the third quarter. That seems like an anomaly at a time when negative absorption and vacancy are on the rise. But Harbert explained that much of the space that has recently come on the market is on the higher end of the price scale, which is helping to keep rents from tumbling. But the flip side is that rent growth has flattened out and will probably reverse. “The lag time for prices to adjust is longer than we think,” Harbert explained. Prices could decline between 15 and 20 percent by the end of next year, a trend that would be consistent with earlier slowdowns. During the recessions of 2000 and the early 1990s, Manhattan office rents only hit bottom three years into the cycle, noted Ken McCarthy, the New York City region’s managing director for research.