Last spring I was asked (again) about the health of the New York City commercial real estate market. Six months later, I am still asked about market bottoms, shifting cycles and the future velocity of leasing (among other variables). How I respond to these questions has changed in recent weeks, for the following reason:
The New York City office market has fundamentally improved from its depressed state since last spring.
Look no further than our third-quarter research report, which was full of market data. One key finding: The overall availability rate for Manhattan at the end of the third quarter of 2009 was unchanged from the second quarter’s level of 13.4 percent. The availability rate actually declined to 11.1 percent from 11.4 percent in midtown south, after posting a string of increases that began in early 2008.
Of course, one very important reason that availability is in the process of stabilizing is the fact that asking and taking rents have come down very fast—much faster than in previous cycles—and by large amounts. After the previous recession, which ended toward the close of 2001, the office availability rate in the city continued to rise in 2002 before peaking in mid-2003, and rents drifted down for two years. Also, rents declined on average by 25 percent last time versus the 35 percent decline that has already taken place.
Our third-quarter reading on the market and forecasting models suggest that availability is close to reaching a peak. The city does have 3 million square feet of new building entering the market in 2010, which will keep the availability rate from dropping by any significant amount over the next year.
Several factors explain why the overall availability rate held steady in the third quarter. First, the amount of leasing, measured in square feet, increased during the third quarter. The average monthly figure was 1.9 million square feet, based on the preliminary numbers for the period. The second quarter’s average was 1.4 million square feet, and leasing averaged just 1 million square feet in the first quarter. While the absorption of space was on the upswing, the amount of space being offered to the market declined in the third quarter. For the quarter as a whole, the amount of sublet space on the market was actually slightly less than in the second quarter.