New York City: A Downturn With Different Stripes

    Just like the national economy, Manhattan office market fundamentals seemed to hit a wall as 2008 ended and 2009 began. The office availability rate for Manhattan as a whole–space that is being activity marketed for leasing–increased from 9.7% at the end of the third quarter 2008 to 12% at

    Just like the national economy, Manhattan office market fundamentals seemed to hit a wall as 2008 ended and 2009 began. The office availability rate for Manhattan as a whole–space that is being activity marketed for leasing–increased from 9.7% at the end of the third quarter 2008 to 12% at the end of the first quarter of 2009. In Midtown, the increase in the availability rate was even larger, rising from 10.4% to 13.3%. The availability rate in Midtown is now already higher than it was in mid-2003, the peak level during the previous cycle. Meanwhile the average asking rent is down 15% to 20% from the peak reached in early 2008.

    However, the actual effective rents, which include adjustments for tenant improvement allowances and the free rent period, are down by substantially more. The decline in rent levels has been more rapid and larger than the consensus was projecting only a year ago. Of course, the increase in rents from 2006 through the early months of 2008 was much larger than the basic supply/demand fundamentals seemed to justify.

    Everybody knows that the office property sector has suffered reversals during the past year, so the numbers just reviewed above shouldn’t be very surprising to anyone. What business or economic fundamentals, however, are driving this pervasive sense of weakness? Through March 2009, the preliminary numbers report that seasonally adjusted total nonfarm employment is down by 100 thousand from the peak level reached in early-2008.

    By comparison in the early 1990s, total employment fell by 350 thousand, about 10%, and the loss was close to 200 thousand in the 2000/01 recession. The Federal Reserve’s forecast, along with other projections, predict that national employment will continue to decline through 2009; even with that outlook, it doesn’t seem that the property markets should be performing so badly; but they are. Not only do the usual demand drivers seem to be less important this time, but the relative performance among the city’s major submarkets is not following the usual pattern.

    The declines in occupancy and rent levels during the current cycle occurred earlier and were more pronounced in the Midtown market than the Downtown and Midtown South markets versus previous cycles. Obviously, a more complex set of forces are at work in the markets today than one would find in a simple business cycle. Is it really that important that we attempt to find out what these new forces are?

    I think the answer has to be yes. The questions plaguing property owners, tenants and third party investors are how long this weakness will persist and how robust will the rebound be once the bottom has been achieved. If we can figure out the dynamics of the downturn, then we might be able to provide a reliable outlook. Going forward, we will investigate these issues and propose some answers for these important questions.