The report says that 16.1 million square feet of Midtown's 34 million square feet of office space has been repriced since last September, resulting in a 28% decline in asking rents compared to the peak a year ago. "Repricing [has] been going on for a while," Pamela Murphy, SVP with CBRE's New York tri-state market data services, tells GlobeSt.com. "We see it turning a corner now, because it takes a few months for a deal to close, and obviously the asking-versus-taking rent numbers are based on closed deals."
Accordingly, Murphy says, "it's a bit of a lagging indicator, because we're talking about deals that were negotiated during the repricing a few months ago. Now we're seeing the fruits of that and landlord and tenant expectations are starting to converge. We expect that to continue well into the year." If the cycle of pricing erosion and recovery resembles the letter U, "we're curving into the bottom of the U."
As of June 1, Midtown average asking rents were $65.13 per square foot for direct space and $56.83 for sublet space, according to CBRE's "Midtown Office Leasing: A Market in Transition" report. That average isn't weighted toward repricing at the low or high ends of the spectrum. "It truly is across the board," Murphy says "With top quality space, more proactive landlords tended to reprice first, whereas less proactive landlords would lag."
The study doesn't get into whether the lackluster investment sales market has an effect on rents, but Murphy says, "They're not entirely disconnected, because the causes of fewer investment sales and a slowdown in leasing activity are similar"--i.e. the downturn. There can be a link, however, between a building's leasing performance and its resale value, she adds. Overall, leasing activity this year is not even expected to match the post-9/11 slump of 10.5 million square feet in 2002, previously the decade's slowest year.
Leasing velocity is expected to begin rebounding next year, as some 20.3 million square feet of leases will roll next year, resulting in 1,380 tenants in the market. The report notes that another 21.2 million square feet will expire in 2013, putting an additional 890 tenants into the market at that time. Although "certain financially challenged firms" will opt to downsize or leave the Midtown market altogether, active tenants in the market will be presented with unusually favorable leasing conditions, according to the report. For a variety of reasons, tenants of all stripes will be looking for direct space rather than subleasing, the report states.
Murphy says that while there may still be some downward pressure on asking rents next year, on the other hand there will also be more tenants looking, which may ease some of that pressure. "As the market's been repriced and tenants are comfortable with the idea that they're dealing with repriced space, they're dealing with numbers that are much more palatable compared to a year ago," she says. "There's a lot of quality space out there, and if tenants aren't focusing on price, they'll be focusing on value and those qualitative aspects of their lease."
The report does not look at repricing in the Midtown South or Downtown office markets, but Murphy notes that compared to Midtown, the run-up in asking rents was not as steep in these markets. CBRE will issue separate reports on Midtown South and Downtown at a later date.
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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.
