New York City’s Office Market Raises Some Positive Flags
- Aug 14, 2009
By Dr. Peter Kozel
Senior Managing Director
New York City
Mounting evidence suggests that the New York City office sector is scraping along the bottom of its cycle and laying the foundation for an improvement in operating performance. The property market itself is offering some of this evidence. Additionally, data from the economy and business sector are providing greater clarity about the dimensions of the contraction in business activity plus what are likely to be the contours of the eventual economic recovery.
Demand for office space evaporated during the first four months of 2009, with leasing volume declining to a monthly rate of just one million square feet, and much of this activity involved 5,000 square foot and 10,000 square foot transactions.
In June and July, however, leasing volume escalated to 2 million square feet in each month, roughly equal to the average monthly total in 2007. An important part of this increase stems from the substantial number of leases signed in those two months for over 50,000 square feet. From approximately mid-June to the end of July, FirstService Williams counted twenty-two lease transactions for 50,000 square feet or more including ten for 100,000 square feet or more. Undoubtedly, there were additional confidential transactions that were not reported.
Some of these large deals were completed by tenants that had been in the market looking for space since 2007. In a few cases, they were close to a deal. But, as rental rates started to decline, they decided to wait. With the average effective rent now down by close to 40% from the peak – and more in some submarkets – these firms must have decided that rents were close enough to a bottom so that a deal struck at this time will not prove to be overpriced six months from now. Additionally, their own business situations must have stabilized to the point that they can gauge how much space they would likely need and what they can carry in occupancy costs.
Since mid-May, net additions to the amount of available space has also slowed from the pace in the previous nine months, down by nearly 50%. The amount of space that is listed as available continues to increase; but what is less clear is whether or not these new listings are really newly available space. The stock of shadow space began to grow in 2008, and some of it has now been shifted to open listing.
In the Midtown North market, availability registered 14.8% at the end of the second quarter of 2009. Our reading of the data points to a peak of 16.8% by the end of 2009 and about the same at the end of 2010. Even though the New York City economy should be on the mend by early 2010 – with modest additions to employment – a little over three million square feet of newly constructed office space will be added to the inventory, keeping the availability high.
So what is the broader economy telling us? The average unemployment rate for the first six months of 2009 in New York at 8.3% remains below the national average of 8.7%. Moreover, the labor force continues to increase in New York City, while it is trending downwards for the nation as a whole.
For the past 24 months, office sector employment is down a total of 5.8% for the U.S. but only 3% for New York City. By contrast, in the 2002/2003 cycle, New York City suffered a 9% cumulative decline but just a 2.4% reduction for the nation. The consensus forecast now looks for the U.S. economy to grow by 2.5% to 3% during the third and fourth quarters of 2009. Since New York City has consistently outperformed the nation during this recession, the city should enjoy a solid bounce in the second half of 2009.
There are plenty of credit problems yet to be worked-out during the next several years. So the recovery will be bumpy. But as the partial sale of 485 Lexington Avenue by SL Green for a 6.2% cap rate indicates, confidence in the New York City office market is beginning to return.