Driven by robust demand from tech and media companies, operations in Manhattan will recover at a moderate pace, though trouble looms in the financial industry. Turbulence in the global economy, a political gridlock in Washington, D.C., and new regulations will prompt hedge funds and investment banks to shed jobs. A few of these users will offer space for sublease to cut costs, which will encourage landlords in Midtown to offer lucrative concessions to compete for tenants.
Midtown South will boast the tightest vacancy in Manhattan in 2012 as media and tech firms backfill space, while the redevelopment of Hudson Yards will ignite leasing activity in the area. Tenants priced out of Midtown will target downtown, where Condé Nast expanded its lease at One World Trade Center to 1.2 million square feet. In Brooklyn, the New York City Human Resources Administration will consolidate operations into 400,000 square feet near Atlantic Yards this year, which will further transform the area.
New York City fundamentals remain among the best in the country. Citywide, payrolls will grow 1.5 percent this year, or 56,000 jobs, while office-using sectors will gain 15,000 positions. In all five boroughs, approximately 1 million square feet of office space will be delivered in 2012, expanding stock by 0.3 percent. Healthy demand from tech companies will help reduce overall vacancy by 70 basis points by year’s end to 9.8 percent. By year’s end, asking rents will rise 4.5 percent to $59.52 per square foot. Effective rents will spike 5.6 percent to $49.05 per square foot.
Investment activity will remain brisk in 2012 as overseas banks liquidate commercial loans, while maturing CMBS debt will prompt operators to list properties. European lenders, including Eurohypo AG, Allied Irish Banks PLC, and Anglo Irish Bank, will shore-up capital reserves by offering notes to private-equity firms at a discount. The new note holder will renegotiate loan terms with the property owner to align debt-service coverage. This trend will unfold in Midtown, where an influx of CMBS debt will mature this year. Elsewhere, REITs and multinational investors seeking lower price points than in Midtown will target highly vacant properties in the Financial District. The buildings will receive a capital infusion and be repositioned to boost cash flow. Outside of Manhattan, local syndicates seeking higher returns will pay cash for value-add, Class B/C properties in Brooklyn and Queens.
Pension funds seeking alternatives to U.S. Treasuries will take an equity position in investment real estate and recapitalize trophy assets through year’s end. Highly leveraged owners will likely use a bulk of the equity to reduce debt, while the remainder will be used for capital improvements to enhance NOIs.
— J.D. Parker is the vice president and regional manager of the Manhattan office of Marcus & Millichap Real Estate Investment Services.