The FirstService Williams report puts Manhattan's overall availability rate at 10.9%, with more than 25% of the total represented by sublease space, the highest rate in more than three years. That includes 2.4 million square feet of sublease space entering the market in the past three months, compared to 1.8 million square feet of directly available space.
"It is highly unusual for the increase in the amount of sublease space to exceed the increase in direct space," Joyce Geiger, chief economist at FirstService Williams, tells GlobeSt.com. "Also, the sublease availability rate is normally about 1.5% to 2%. It has risen already to 2.8%, with more to come." She says sublease space may eventually comprise 40% of the total amount of available space, as it did during the dot-com bust.
The sheer volume of sublease availability poses a challenge to building owners, Geiger says. "Sublease space tends to pull rents downward because sublessors are less price sensitive," she says. "As the amount of sublease space increases, so does the competition for tenants, especially since this space is finished and frequently furnished. If the sublessor is facing financial distress, the landlord could be in danger of not receiving rent. Depending on the size of the tenant, that could cause a serious disruption to the property's cash flow."
CBRE's market snapshot shows negative absorption of 3.83 million square feet during November, a figure that represents a big chunk of Manhattan's YTD negative absorption of 11.55 million square feet. The Williams report puts the YTD negative absorption at 11.2 million square feet; in any case, it's a big change from the positive absorption of approximately one million square feet seen during 2007.
A major factor in this year-over-year change has been the reversal of fortune in the financial services and law sectors. As they were leading drivers of leasing activity in recent years, so they have contributed heavily to the availability rate. The FirstService Williams report notes that financial giants such as Citigroup, Credit Suisse First Boston, Credit Lyonnais, Alliance Bernstein, UBS and MetLife have placed almost 1.2 million square feet of sublease space on the market in Q4. Law firms contributed 230,000 square feet of sublease space and 450,000 square feet of direct space to the totals, according to Williams.
Midtown experienced the greatest increase in its availability rate, says Williams, which notes that 83% of the sublease space added during the quarter came from Midtown. The submarket reached 11.9% this quarter, an increase of 4.1 percentage points from a year ago and 1.5 percentage points from Q3. Leasing activity in Midtown for the year was 13.6 million square feet, a 16.1% decline from a year earlier. CBRE's market snapshot puts the YTD total at 11.44 million square feet for Midtown, and asking rents there at an average of $80.87 per square foot, compared to a figure of $88.81 Williams cites.
Both the CBRE and Williams reports note availability rate increases for Midtown South. Williams puts the rate at 8.5%, while CBRE reports 10.5%. The year-over-year increase reported by both firms is comparable, about 1.5 percentage points. Williams cites a 9.6% year-over-year drop in overall asking rents for Midtown South to $55, while CBRE reports an average of $52.46--higher than the November '07 figure of $51.07 but lower than the October '08 average of $52.77.
Downtown's availability rate rose to 10.5% at year's end, according to Williams, while CBRE's snapshot for November pegs at it 10.1%. Asking rents Downtown average $49.19 in CBRE's report and $49.72 as noted by Williams. The tenant improvement allowance Downtown averages $54 per square foot--higher than the Midtown and Midtown South allowances of $37 and $38 per square foot, respectively, according to CBRE.
"With the economy expected to remain sluggish at best during the 2009, it is inevitable that the availability rate will rise further and rents will continue to decline throughout the next several quarters," says Robert L. Freedman, executive chairman of Williams, in a release.
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Paul Bubny
Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.
