Colliers, C&W: Manhattan Office Market Offers Tepid but Promising Outlook

Manhattan’s commercial real estate market is getting its report cards for the first quarter, and two of the city’s top brokerage firms are handing out mixed grades.

Joe Harbert

Manhattan’s commercial real estate market is getting its report cards for the first quarter, and two of the city’s top brokerage firms are handing out mixed grades.

First, the so-so news: “I would say it’s a rather weak first quarter,” said Joe Harbert, president of Colliers International’s eastern region, at a press briefing on Tuesday. He pointed to the steady, if stagnant, activity in the city’s 400 million-square-foot office market, which recorded about 4.9 million square feet of leases in the first three months of the year, according to Colliers and CoStar research. That total is basically a wash with the fourth quarter of 2012.

Midtown North, the largest of Manhattan’s three major office submarkets, has recorded seven consecutive quarters of increasing availability—long enough to constitute a trend, Harbert said. At this pace, leasing would continue last year’s trend, when volume declined 4.4 million square feet year-over-year, although Harbert said he expects activity to pick up.

Peter Kozel, executive managing director and chief economist for Colliers’ Tri-State region, identified a familiar culprit. “The financial sector is still an enormous drain on this economy,” he argued. “That sector has really got to do better of the New York City economy is going to power ahead.” At a Wednesday morning briefing, Cushman & Wakefield Inc.’s regional chief economist Ken McCarthy agreed:  “The financial sector is where the weakness is. That’s been the main culprit for New York.”

But there is more to the New York story. As McCarthy also pointed out, the city’s employment picture continues to outperform the rest of the nation; since the lowest point of the recession, the city has recovered 178 percent of the jobs it lost, second in the United States to Houston.  At 9.1 percent, the vacancy rate indicates a market that is close to equilibrium, noted Ron Lo Russo, president of Cushman & Wakefield’s Tri-State region.  New leases in Downtown Manhattan helped push absorption onto the positive side of the ledger at 392,000 square feet during the first quarter.

A year ago at this time, negative absorption totaled 373,000 square feet. Jared Horowitz, a Cushman & Wakefield executive director, noted that sublease space in Midtown Manhattan as a percentage of total space is at its lowest point in a decade. And Manhattan’s Midtown South district continues to take top honors as the nation’s tightest office submarket with a vacancy rate of 6.9 percent.

On another positive note, Colliers’ Harbert reported that new leases accounted for 80 percent of activity in the first quarter, down from only 51 percent as recently as the second quarter of 2012. That, he explained, is a sign of renewed confidence among tenants. Moving to new space also has a multiplier effect, requiring spending in moving, tenant improvements and other investments, he added.