S&P's analysis, "The New York City Office Market Faces Challenges in its Recovery," predicts that the erosion in pricing of the past two years will continue as additional sublease space hits the market, capital flows expand to other sectors and hoped-for rent hikes fail to materialize.
In addition, S&P expects the US economic recovery to be sluggish, employment to grow slower than usual and Wall Street to remain a weak sister. That combination puts New York in the same boat as other US cities, all of which are likely to face a series of fiscal fits and starts over the next few years. Factor in the effects of Sept. 11 on the local economy and New York looks especially vulnerable.
Trammel Crow also points to the financial services sector for reversing a number of positive signs, including a stabilizing commercial office market and an uptick in the manufacturing sector. Reduced activity and diminished staffing needs in the investment banking industry are singled out as primary factors behind a recent reversal of fortunes. Information technology firms also take their share of the blame, as venture capital investment slips ever further into the mud.
In considering a recovery, Trammel Crow holds out little hope for the near term. Climbing unemployment--7.6% for May and June compared to 5.4% for the first six months of '01--and a recent turnaround in the Business Conditions Index of the National Association of Purchasing Management-New York, indicate tough times to come. Though it had been steadily climbing back toward Sept. 11 levels since February, the BCI fell 1.5% in June, nearly wiping out the previous month's gains.
Grubb & Ellis takes a slightly more temperate view of the future, though the picture it paints is no Mona Lisa. Rent depreciation in Midtown and Midtown south has slowed, which Grubb says points to a more stable market environment. But both markets are expected to experience a slow increase in vacancy rates for the rest of the year. And while sublease space coming on to the market appears to be flattening out this year, with more than 17 million sf of sublet space available in Manhattan, it remain a renters' market.
Moreover, with no mass hiring on the horizon, layoffs still occurring and corporate scandals rising up faster than a batch of Martha Stewart's muffins, economic recovery, and the space demands that go along with it will be slow in coming.
So how is it that Long Island is on solid ground while the city scrambles for a toehold? According to new I/ESG research, the area is sufficiently diverse that descending market sectors are balanced out by ascending ones. The Long Island office market has more than held its own, with industry fundamentals showing marked improvement over the first half of 2001. Steady demand and limited new product have kept office trends stable throughout the past few years.
Once again, unemployment is a key factor in the area's overall stability. While New York State and national unemployment figures have spiked up over the past year, Long Island's dropped, albeit at a lower rate than in past years. Key sectors adding jobs included health care, education, social services and government.
I/ESG's study concludes that while corporate consolidations could increase availabilities, Long Island's real estate market should remain healthy through the rest of the year.
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