"Based on our analysis, market performance during the first half of the second quarter was essentially a continuation of the first quarter as demand for space weakened at a very rapid pace," according to the FSW report, which notes that Manhattan's availability rate rose from 12% in Q1 to 13.4% this quarter, with 4.7 million additional square feet put back on the market. That rapid pace slackened during the quarter's second half as the net total of available space added to the market "actually slowed noticeably. While this is only fragmentary evidence, it might be a significant development that represents a 'green shoot' of a nascent recovery."
Mark Jaccom, CEO of FSW, adds in a release, "As the quarter ended, we also found that firms that earlier were not even beginning the decision-making process quickly shifted and ramped up their search activity." The report says the change in tenants' attitude coincided with a generally more upbeat feeling about both the national and regional economies, as the stock market rebounded, he bankruptcy filings of Chrysler and General Motors staved off a shudown of the auto giants and spending from the stimulus package continued to trickle into the national economy.
On a more local level, the report cites the major banks that have received permission to repay their TARP money and have acted quickly to do so. Additionally, for these banks the level of trading activity has jumped; bond issuance has also increased; and net interest margins are fairly wide. "All of these developments are fueling projections that the major financial institutions will end 2009 with stronger balance sheets and substantial gains in annual revenues," the report says.
However, Robert Freedman, executive chairman of FSW, sounds a more cautionary note. "There are signs that the worst may be over for the New York City office market, but availability rates are high and that has put downward pressure on asking and taking rents," he says in a release.
Average asking rents in Manhattan had fallen from $65.18 per square foot in Q1 to $58.52 by the end of Q2, down more than 25% per square from the $79.39 average a midyear 2008. Taking rents may be down even more sharply; FSW estimates a 35% to 40% drop over the past year.
The report notes that "investment sales volume during the second quarter completely stalled with no completed transactions for class A or class B properties." The sale of AIG headquarters at 70 Pine St. and 72 Wall St., announced in June and estimated at $140 million to $150 million for the two properties, is still under contract. Year-to-date volume for Manhattan property sales is $950 million from three completed transactions, an 88% drop from the $8 billion in sales and 19 completed transactions in the first half of '08.
Given the continuing difficulty of obtaining long-term funding for large commercial transactions, the report notes, "it's hardly surprising that seller financing has become an important liquidity measure." However, the report says seller financing is "merely a short-term solution" and both the private and public sectors must develop new means of generating liquidity.
"The apparent collapse of the latest attempt to sell Worldwide Plaza and the billions of dollars of loans coming due in the next few years both show that this financing gap must be bridged," says Jaccom in a release. "Anticipating that this will happen, we are preparing for a tsunami of business ahead."
Although Colliers ABR is still a couple of days away from releasing its latest monthly and quarterly Manhattan reports, the firm's Robert Sammons tells GlobeSt.com, "We see some encouragement as well but I would be hesitant to say we've reached the bottom. Just one month of slight improvement does not make a trend."
The big picture is "still rather negative: less consumer spending, higher savings rate, unemployment still high, possibility of commercial mortgage defaults climbing, etc.," says Sammons, managing director in charge of research at ABR. "On the flip side, at least locally, we've seen more 'deals being done' as tenants run up against their lease expirations. There is not necessarily any positive absorption going on as of yet, just renewals and relocations of an equal or lesser amount than that tenant may currently occupy."
More reporting on Q2 results in Manhattan and the metro area will appear as reports become available.
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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.
