"The fact that overall conditions deteriorated in the opening quarter of 2009 is hardly surprising," Mark Jaccom, CEO of FirstService Williams, says in a release. "Large financial institutions that are major users of space in the city had earlier announced both employment reductions and goals to utilize less space per employee. Going forward, the questions for many tenants center on projected occupancy costs in 2010 and 2011."
As has been the case historically, Midtown led the office market during the quarter—but in this case, the leadership was in negative indicators. Williams puts Midtown's availability rate at 13.3%, an 85% increase since Q2 2007 and only 1.4 percentage points below the peak it reached in Q2 2003. The JLL report says overall availability in Midtown office has risen to 12.8%, reaching 13.5% in class A properties. These figures represent increases of 63% and 71%, respectively, from the year prior.
Midtown also leads the Manhattan market in sublease space: 30% of available Midtown space falls into the sublease sector, compared with 25% for the market overall. The 2.8 million square feet of Midtown office space put back onto the market during Q1 2009 represented more than 70% of the quarter's negative absorption of 3.9 million square feet, Williams says. That figure does not include shadow space, according to a release.
The Midtown South availability rate, which peaked at 13.6% during the economic slowdown earlier this decade, has thus far stayed in the single-digit range during this downturn, ending Q1 '09 at 9.8%. That compares to 8.5% level in Q4 '08, Williams says. Downtown's availability rate has increased slightly less than 30% over the past five quarters, reaching 10.8%. According to Williams, it's surprising that the decline in the Downtown market has not been more severe, given the shocks to Wall Street. However, "it is expected that this submarket will experience additional weakness in 2009 as the excess space held by financial firms reaches the leasing market," according to a release from Williams.
James Delmonte, VP and director of research at JLL, says in a release that new leasing activity has waned "considerably, with three of the top five transactions so far this year being renewals. Deal volume has slowed to the point that just four transactions larger than 100,000 square feet were completed in Manhattan in the first quarter of '09, compared to more than 17 in the first quarter of '08."
The average asking rent for Manhattan declined to $65.18 per square foot in Q1 of this year, compared to $74.49 per square foot in the fourth quarter of '08, according to Williams. "While the average rent had been drifting lower for much of 2008, the most recent 12.5% quarterly decline represents a clear indication that asking rents are beginning to capitulate to the realities of weaker demand," according to a release. Manhattan's average asking rent has declined by 17.9% from the peak in rents reached in the second quarter of '08."
The firm predicts additional declines in asking rents for the second and third quarters of this year, thanks to "the recent negative trend in effective rents" in completed transactions. "As in previous down cycles, it is the escalation in the proportion of sublease space that will have a strong downward impact on office rents." Quarterly Manhattan market reports from CB Richard Ellis and Cushman & Wakefield will be issued early next month.
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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.
