"It's kind of a good news, bad news situation," Bruce Mosler, president of US operations for Cushman told GlobeSt.com during an interview earlier today. "The challenging news is that the sublease market makes up a disproportionate share of total availability. But whilst there is a significant portion of total space [on the sublease market], it is marked down so that it will move."
Companies with space to lease want to remove it from their balance sheets as quickly as possible, and are "pricing it beneath direct space so that they achieve their objective, Mosler stated. Direct space, he noted, "will compete where ownerships choose to compete." So, while he predicts that the first half of '03 will be "directed toward removing sublease space," by Q4 "you'll see rents begin to trend upward again in the direct market."
And while growth in the real estate industry will always remain inextricably tied to the local and national economic health, Mosler predicted that, over the next few quarters, companies will once again prove "willing to assume risk," which, in turn, will stimulate the overall economic picture. That, he states, "is part of the equation for 2003."
Prudence, however, will be the rule rather than the exception in corporate decision-making going forward, so "slow growth in 2003, picking up in '04" is to be expected. Still, Mosler says he is optimistic about the industry's prospects for the year ahead. "It's going to be a better year than most people anticipate," he says.
"Subleases are competing with direct space and space is starting to be filled," says Ken Krasnow, senior managing director and head of C&W's New York office. "But if the market experiences any more major space additions due to corporate downsizing, we'll be looking at higher vacancies by the end of this year," he cautions.
Still, if the city's financial sector manages to stay on an even keel this year and growth areas including law, insurance, membership organizations and engineering continue to prosper, bargain-basement sublease pricing could overcome what has become the local real estate community's most stubborn stumbling block. According to C&W's newest MarketBest Snapshot, "Credit-worthy tenants are in the enviable position of negotiating for additional allowances for improvements or extra months of free rent. It is widely estimated that taking terms are as much as 10% to 15% lower that asking rents. Overall average rents for Manhattan finished the year at $42.96 per sf, down from $46.67 at year-end 2001."
Cushman year-end statistics for 2002 support Mosler's optimism. While '02 was seen as a soft year in the city's office market, overall leasing activity for the year totaled 20.8 million sf, above last year's level of 18.9 sf, according to C&W Research.
"Demand for office space is still low, but the upturn in leasing activity signals stability in 2003," says Krasnow. "Midtown South and Downtown should see their vacancy rate decline by the end of 2003, while Midtown will face some challenges due to the delivery of new construction at Times Square Tower, 300 Madison Ave. and Columbus Circle."
Significant leases completed in 2002 included the United Federation of Teachers at 52 Broadway (379,841 sf), Morgan Stanley at 1221 Avenue of the Americas (299,200 sf), Foote Cone & Belding at 100 West 33rd St. (273,882-sf) and Aon Corp. at 55 E 52nd St. (242,658 sf).
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