Op-Ed: The Recession’s Untold Story
Tom Acitelli Nov. 19, 2009, 3:12 p.m.
Since the start of the recession, uncertainty and declining economic indicators have made it too easy for the majority of industry experts and outside observers to be overly pessimistic about the health of the commercial real estate market.
You’ll recall the language of the most frequent offenders, who have a tendency to portray commercial real estate as “the next shoe to drop.”
I completely agree that in the present market environment, there is cause for caution on the part of investors, cause for concern on the part of owners and lenders and cause for attention on the part of the city, state and federal government. But what’s more important-in order to accurately assess the current state and the outlook for the sector-is for industry participants and observers to segment the market prior to offering a diagnosis.
There are challenges, and there are opportunities; and they are very different depending on the city, the property type and the quality of the asset. That’s why the state of the commercial real estate market in New York City, in particular, has to be considered independently from the national commercial real estate market.
Based on its defining characteristics, which make it the most vibrant central business district in the United States, on top of the positive trends starting to develop in the economy and market today, New York is among the most resilient markets in the nation, and it may recover stronger and sooner than anyone would have predicted a year ago. In fact, the relative health of New York is the untold story of the recession.
Manhattan is the largest commercial real estate market in the United States. Midtown alone, at approximately 240 million square feet, is more than twice the size of the next largest market, Chicago. If downtown and midtown south were considered on their own, they would constitute the fourth- and fifth-largest commercial real estate markets in the nation.
The New York Metropolitan Area has a gross domestic product of $729 billion, the largest of any city in the United States, and larger than all but the four largest states by population-California, New York, Texas and Florida. Moreover, if New York City were a separate country, it would have the 17th-largest G.D.P. in the world, larger than nations such as Sweden, Switzerland and Taiwan.
That density and productivity, together with a talented and driven workforce, premier higher education, and world-class arts, culture, leisure and entertainment, are the very reasons that businesses choose to bring their workforce together under the bricks, glass and steel of New York’s office buildings.
At the end of the third quarter 2009, all three Manhattan submarkets had a vacancy rate below the national average of 14.3 percent, with the overall Manhattan vacancy rate at 11.1 percent. The midtown vacancy rate was at 12 percent, and downtown and midtown south at 9.9 percent and 9.4 percent, respectively. Midtown south and downtown also boast the two lowest vacancy rates in the United States among the 33 central business districts tracked by Cushman & Wakefield.
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.