Manhattan Loses Resiliency, Thanks to Banks Misfortunes

The bankruptcy of Lehman Brothers, the sale of Merrill Lynch to Bank of America and the ongoing financial woes of AIG that unfolded over one weekend in September were among the latest wave of bad news for New York City’s office market to digest. The three firms own or lease 9.5 million square feet of office space in Manhattan, according to the Associated Press.Manhattan’s office vacancy was at 7.1 percent, according to a midyear report on the market from Cushman & Wakefield Inc. While that is a healthy figure, it is also one that is on the rise, increasing 1.8 percentage points from the same period in 2007 and now at its highest level since the third quarter of 2006. Manhattan has traditionally been named one of the United States’ most resilient office markets, but “more and more, it’s being dropped from the list,” observed Robert Bach, senior vice president & chief economist at Grubb & Ellis Inc., noting that the market has seen a quick reversal of fortune.Lehman’s headquarters near Times Square has approximately 1 million square feet of office space. The firm bought the 32-story building from Morgan Stanley in 2001 for about $700 million.With New York living through what he called a “recurring nightmare” of financial service firm meltdowns, Bach named Seattle, Houston and Washington, D.C., as three cities that are still passing the resiliency test. All have different drivers to growth, Bach said. Seattle’s office inventory is being boosted by exports, Boeing Inc. and technology. Washington, D.C., continues to be strengthened by the huge federal government presence. And Houston benefits from the energy sector and ancillary firms that serve that industry.But Bach says the list of strong office markets is growing shorter. A slowing economy and a significant nationwide office construction pipeline of 100 million square feet pose obstacles to health. “There will be a price to be paid for the economic slowdown, and it’s higher than it is sometimes portrayed,” he said.