Stated another way, the occupancy rate for Manhattan office space was near 89 percent at the end of the third quarter, and midtown south and downtown had an occupancy rate above 90 percent. If you remove sublease space from the vacancy, the actual occupancy rate rises to 91.7 percent in Manhattan as of the end of September.
The white elephant on the horizon is employment, clearly the factor with the most direct impact on office-market fundamentals. But the employment picture in New York has also fared better than the national average. Payroll employment has declined 3.4 percent in New York, compared to 5.3 percent nationally. Office-using employment in New York has declined 6.1 percent, compared to 7.5 percent nationally.
And if you consider the positive aspects of the latest national employment report, the figures suggest we are close to recovery. First, the pace of layoffs is decelerating. The total payroll employment decline in October was 190,000, the second-lowest figure for the year. Combined with the revised August and September employment statistics, the three-month average decline is the lowest since August 2008. Most significantly, October statistics showed employment in office-using industries (financial, professional business services and information) increased by 9,000 jobs, the first increase in office-using employment since December 2007.
There will certainly be more challenges to the market fundamentals, but that’s simply why it’s so evident that businesses and investors in New York have a window of opportunity today to take advantage of incredible value that will not be available for long.
From a leasing perspective, rents have been repriced, nearly 25 percent on an asking-rent basis for midtown’s best buildings, to as much as 40 or 45 percent in some cases on a taking-rent basis-including landlord concessions. This is driving tenants back to the negotiating table and leasing activity has risen substantially in the past few months compared to the first half of the year.
Obviously, lower rental rates will impact property values, and cap rates for properties that do trade in the near term will rise from historic lows. But as rental rates firm up, whether in 2010 or 2011, and concession packages dwindle, cap rates will come back down and the pundits and the buyers targeting distress will be disappointed.
Remember, this is New York, and from a commercial real estate investment perspective, New York is viewed by global investors as a safe haven and a world-class city. Indeed, as we’ve already established, there is no other city quite like it.