Clearly, the demand for office space has significantly diminished since the end of last year. Office leasing is directly related to jobs and the expectation of future employment and, therefore, over-reliant on Wall Street. However, it does lag behind the stock market somewhat. Having said that, it is important to look at the Manhattan office space market with a broader perspective. The unique advantages of New York City include the diversity of businesses residing here and the transportation infrastructure that makes it easy for people to get to work. Other cities such as London, Seattle and Silicon Valley, California, are far more reliant on specific industries and their market tends to suffer more dramatically when those industries are in decline. Although the financial services and banking industry represents a large portion of the overall inventory of office space in Manhattan, industries such as healthcare, legal (with strong bankruptcy and litigation departments) and accounting have shown resilience — and in some cases growth — of their businesses.
The subleasing of excess office space, although predominantly in the financial services sector, also includes retailers, law firms and pharmaceutical companies. Recent major leases include: Deutsche Bank, which renewed 150,000 square feet at 345 Park Avenue; West LB Bank, which took 129,000 square feet at 7 World Trade Center; Pryor Cashman, which signed on for 100,000 square feet at 7 Times Square; and Sonnenschein Nath & Rosenthal, which leased 135,000 square feet at 2 World Financial Center. In a Midtown Class A building, the vacancy rate as of January was 11.3 percent and the overall Midtown vacancy rate is 11.5 percent. In terms of rental rates, the best I can say is that the values are decreasing and there are not enough completed deals to determine baseline values at this time. Landlords are looking to capture whatever tenants are out there and negotiate the best terms possible. Of course, the tenants with strong financials are always more desirable and are likely to secure more favorable terms.
Office development has all but ceased in Manhattan with the exception of 11 Times Square, 510 Madison Avenue and the renovation of 545 Madison Avenue. There is talk of Extell Development moving ahead with the Diamond Center building on West 47th Street but nothing has begun to date. By far, the most opportunistic submarket in Manhattan is the sublease market. Tenants today are looking for value, as well as minimal capital expenditures. When markets have an oversupply of direct and sublease space, tenants are attracted to the most improved and desirable spaces first. Furnished subleases, pre-built space and space that is constructed by the landlord as a turn-key tend to lease first. To those tenants for whom it is not necessary to be in Manhattan, Downtown Brooklyn and Long Island City offer the most favorable rents, terms and incentives.
— Harry Krausman is managing director at Colliers ABR.