4Q12

Weathering the Storm: 4th Quarter Leasing Saw Improvements

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Times of change and uncertainty are always worrisome for investors—fear takes hold, spending is called into question and valuations become unpredictable.

Mix an election season with the impending threat of a potentially devastating fiscal cliff, then throw in a destructive, rogue tropical storm named Sandy, and you’ve created an environment that is not conducive to a stellar business quarter for the commercial market.

However, thanks to tax law-motivated sales and retail—as well as a handful of big end-of-year leasing deals—the fourth quarter ended on a relatively positive note, despite a slowdown in leasing activity.

4Q12 for web“When you’re in the midst of survival, you’re not necessarily thinking about closing the next real estate deal,” said Joseph Harbert, president for the Eastern region at Colliers International. “So the fact that we went through this quarter and survived a national election, the European debt crisis, the impending fiscal cliff and a hurricane—I think we did pretty damn well.”

In terms of square footage volume, leasing reached its highest point for the year in the fourth quarter. The three previous quarters showed an average of approximately 5.5 million square feet leased, while the past four months saw 6.5 million leased, due in large part to massive deals, including Microsoft signing a 230,000-square-foot lease for its new Midtown headquarters at 11 Times Square.

Other large transactions that pushed the fourth quarter into the realm of statistical success despite sluggish leasing activity included Kaye Scholer’s lease for 260,000 square feet of space at 250 West 55th Street, law firm Chadbourne & Parke’s 200,000-square-foot deal at 1301 Avenue of the Americas, Macy’s renewal and expansion at 1440 Broadway and the New York City Law Department’s lease of 131,946 square feet at 100 Church Street, among others.

“There’ve been only two years since 2006 where the fourth quarter was the highest quarter, and this year was one of them,” said Jonathan Mazur, director of research with Cushman & Wakefield, adding that the other was 2010.

“Subleasing, as a percentage of all space, fell in the fourth quarter—the lowest level in six months,” said Mr. Mazur. “There are indicators that are positive, but we still have a little ways to go before the market is firing on all cylinders like it was in ’06 or ’07.”

Despite the statistical boost from large transactions, Manhattan’s Class A availability spiked at 14.5 percent, according to figures released by Studley. That change can be attributed to new product in lower Manhattan as well as several significant blocks of space in existing properties that fell inside the 12-month availability window. In Manhattan, Class A office availability is now above the high point of the most recent recession—the highest level since the early 1990s.

Such availability—from which Midtown South seems to be immune—could draw pricing pressure, and landlords could lower rents to attract tenants, said Jeffrey Peck, senior managing director with Studley. “I think that pricing will either remain the same or you’ll start to see some landlords reach for deals,” he said. Though he could not be more specific for fear of disrupting negotiations, he said he already sees such a trend beginning.

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