The Op-Ed Page: Why Winter Is Springtime for Office Market
Tom Acitelli Oct. 13, 2009, 3:43 p.m.
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.
A sense that the economy had bottomed out and that business would eventually improve became the consensus view as the third quarter began. This change in attitude prompted some tenants to complete their space searches or to hold on to space that was only partially utilized. The number of property tours conducted in the third quarter also increased over the level in the first and second quarters.
New York City’s economic fundamentals began to improve. While the headlines announced that New York City’s unemployment rate bumped up to 10.3 percent in August, the highest since 1993, other measures of the economy’s pace of activity told a different story.
First, though the New York City August unemployment rate is above the national figure, New York City’s average level for 2009—January through August—is still below the same figure for the country as a whole. The size of the New York City labor force continues to grow. It’s up 2.2 percent over the past year; there was zero increase for the nation as a whole. This indicates that labor-market conditions have not deteriorated to the level where large numbers of people are discouraged from entering or remaining in the labor force.
One key statistic for the office sector is the level of employment, or the actual number of people working, which is more significant than the unemployment rate when it comes to the real estate market. In July, payroll employment in New York City increased from the June level, and the August number was essentially unchanged from July. More people in jobs means more office space occupied.
I am sure that people will continue to ask me for my opinion about when the market will improve. But I predict that over the next year, the question will gradually morph into a different one: “Now that the market has stabilized, what will the up cycle look like?”