Manhattan Office Market Reaches Uncharted Waters

The flagship of the United States office investment and leasing market, Manhattan is now also at the heart of the financial crisis. The stunning events of recent weeks point to a new era for the economy, but experts differ about how the changes will play out in Manhattan’s commercial real estate market during the next several quarters and beyond.Some industry veterans are offering a stark assessment. “In the last couple of weeks, it’s become obvious that the fundamentals are changing,” Eric Michael Anton, an executive managing director for Eastern Consolidated, the Manhattan-based investment advisory firm. he told CPN this afternoon. “I think we haven’t seen the real pain yet.” A stream of bad news has self-fulfilling prophesies that have finally filtered beyond the capital markets and spooked the economy at large, he noted.A study published recently by Reis Inc. corroborates the sense that the economic contraction is taking hold. Nationwide, the overall vacancy rate rose in 64 out of 79 markets last month, compared to rates that improved in only 11 markets. Even though Manhattan still boasts the nation’s vacancy rate, vacancy still increased from 5.7 percent to 6.1 percent. The financial industry shakeout will undoubtedly return sizeable amounts of space to the market, but equally troubling is the likely downsizing by smaller firms whose businesses depend indirectly or directly on financial services, Anton noted.Nevertheless, turmoil in the financial system cannot undermine Manhattan’s stature as a national and global business capital, argued Frank Doyle, a managing director for Jones Lang LaSalle. For leading office owners, it is still business as usual, said Doyle, whose office represents a number the city’s blue-chip landlords. “It would be silly to say that there hasn’t been a pause (in leasing activity) . . . but things are settling down,” he said.Ironically, the current climate could even present some unexpected opportunities for landlords. An industry veteran who requested anonymity reported that a law firm is closing its new opened office in a Midtown Manhattan trophy tower early next year. The move that will return some 150,000 square feet of freshly built-out space to the market. Because the tenant signed the lease shortly before Class A rents in Manhattan zoomed more than 30 percent last year, the space should command a price higher than it did a few years ago.Leading service firms are scheduled to release their third-quarter Manhattan statistics this week, and the results will indicate to what extent the market is worsening. By the end of August—the most recent month for which statistics are available—leasing velocity dipped from 15.8 million square feet to 13.18 million square feet, according to CB Richard Ellis Inc.’s report last month. And negative absorption totaled 5.46 million square feet through the first eight months of 2008, a sharp downturn from 2.58 million square feet for the same period of 2008.