Colliers: Midyear, Uneven U.S. Economy Worrisome, but NYC Enjoys Banner First Half

Halfway through 2013, New York City’s office market continues to transcend the uneven national economy, even as economists limit their expectations for the rest of 2013.
Joe Harbert

Joseph Harbert, president of Colliers’ eastern region

Halfway through 2013, New York City’s office market continues to transcend the uneven national economy, even as economists limit their expectations for the rest of 2013.  That was among the insights offered Tuesday by Colliers International during a mid-year market briefing in Midtown Manhattan.

“The recovery is not broad-based,” said Peter Kozel, executive managing director & chief economist for Colliers’ tri-state region. “It’s very concentrated in a few places.” The energy sector is powering job growth in states like North Dakota, Texas, Alaska and Wyoming. Texas has single-handedly accounted for 13.8 percent of national employment growth since the beginning of 2011, even though it has only 8.1 percent of all employment. He expressed concern that the Federal Reserve’s plan to wind down the monetary stimulus program known as quantitative easing will further hamper economy. Kozel also noted that the International Monetary Fund has revised its estimate of growth in global economic output down from 3.6 percent to 3.1 percent since the beginning of the year.

For Manhattan, the outlook is considerably brighter. Total leasing for the first half hit 14.5 million square feet, suggesting that Manhattan is on a pace to beat last year’s 23.8 million-square-foot total. Office leasing for the second quarter hit 9.6 million square feet, Manhattan’s most productive period since the fourth quarter of 2009. In particular, “The month of April was a blockbuster month,” said Joseph Harbert, president of Colliers’ eastern region. In another piece of good news, about 80 percent of the activity this year reflects new leases. “Sublease space is only about 16 percent of the market,” Harbert added. “When it does come into the market, as it did at 299 Park (Ave.), it disappears overnight.”

On the pricing front, the average asking rent in Midtown North increased 1.7 percent to $66 per square foot during the second quarter, but Harbert pointed out an even more noteworthy trend: “Deals over $100 per square foot have come back into the market.” He attributed the return of premium pricing largely to hedge funds and private equity funds, the same deep-pocketed tenants who were willing to pay top dollar for trophy space before the recession.

As it was last year, the sweet spot for leases is between 25,000 and 100,000 square feet. During the first half, 38 percent of leases-3.6 million square feet—fell into that category. Moving up to second place, leases between 10,000 and 25,000 square feet made up 20 percent of the total. As often happens in Manhattan, the makeup of most active industries has evolved somewhat in the past year. Though financial services is still the single largest tenant category, accounting for about 20 percent of leasing so far this year, its share of Manhattan’s leasing volume slipped from 30 percent in the first half of 2012. Legal services recorded the single biggest jump, from 2.6 percent at this point last year to an 11.7 percent share so far this year.

Tenants in the hunt for Manhattan office space may face short-term challenges. Vacancy stands at 6.4 percent overall; Midtown South, smallest of Manhattan’s three submarkets, ranks as the nation’s tightest central business district, with a vacancy rate of 4.9 percent. Tenants able to look farther out will likely have more options, since Manhattan’s availability rate is about 12.1 percent.

Office Investment sales have slowed since mid-2012, as volume slipped $1 billion year over year to end the first half at $8.5 billion. As activity has slowed, prices have increased dramatically; the $9.5 billion worth of office sales last year represented 65 deals. During the first half, only 25 sales accounted for $8.5 billion in volume. Harbert and Colliers brokers suggested multiple reasons for the higher pricing: the pressure on investment managers to allocate capital to real estate, investor interest to repurposing office buildings to residential or hotel properties; capital made available by low interest rates; and continued investor confidence in Manhattan as the gold standard among office markets in the United States.