Drilling down into the numbers, the FSW report finds that the actual results for asking rents differed according to whether the spaced in question was direct or sublease—and further, whether that space was located in Midtown or Midtown South. Although asking rents slipped for direct space in Midtown, they rose for sublease. For Midtown South, it was just the opposite.
"These highlighted rent movements in the direct and sublet components from quarter to quarter are more the result of the qualities of the available spaces in each of the two timeperiods than any subtle shifting of market supply/demand dynamics," FSW chairman Robert Freedman says in the report. "The overriding conclusion is that the amount of available space contracted in these two markets, and there is no significant amount of new construction that will be completed in either of these markets during the next two years, aside from the completion of 11 Times Square in early 2010." He adds that even assuming only moderate economic growth, "space availabilities will become tighter in 2011 and 2012."
The report notes a "small but significant decline" of 2.6% in the amount of sublease space across Manhattan during Q1. The size of the decline, though, resulted from what the report called "continued deterioration in the Downtown market," with a 32.7% increase in sublease space during the quarter. On their own, Midtown and Midtown South showed improvement.
Observes Mark Jaccom, CEO of FirstService Williams, "The sublease situation is substantially different in the Midtown and Midtown South markets, with the amount of sublease space available falling dramatically in both markets." In the case of Midtown, the quarterly decline was 9.3%, while for Midtown South it was 16.8%. "Sublease space has become less of a factor" in both markets, Jaccom says in the report. At the same time, the report notes, "the availability of direct space also fell."
In the view of market experts, "a surfeit of sublease space is the critical element in putting downward pressure on lease rates," the report states. "Sub-landlords are more interested in minimizing the net cost associated with a space decision gone badly, even though this real estate predicament is often a relatively short term issue. Property owners, on the other hand, may well be thinking about pricing in terms of maximizing returns on a generational basis. They might be less willing to drive asking rents down to capture a deal in a momentarily depressed market."
Another positive indicator cited by the FSW report is a year-over-year improvement in leasing activity across Manhattan: 3.8 million square feet for Q1, compared to 3.4 million feet during the first quarter of '09. The report says that Manhattan's overall availability rate dropped to 13.6% by the end of Q1, down 200 basis points from 13.8% at the end of last year.
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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.
