The Op-Ed: Office Leasing 101 for 2010
From an office-leasing perspective, the latter half of 2009 was a world apart from the first half.
For the first five months of the year, Manhattan leasing activity averaged 925,000 square feet per month, compared with an average of 2 million square feet under normal market conditions. In the six months from June through November, the average monthly leasing activity totaled 1.5 million square feet, up substantially from the average in the first five months, but still below the norm.
Year-to-date leasing activity through November was 14.1 million square feet, down 23 percent from 2008 and the lowest volume on record. However, if the pace of activity in the first half of the year continued through 2009, leasing would have been off by nearly 40 percent from last year.
So while recent activity levels can’t be described as strong, they are certainly a healthy sign, given the drought in activity through the first five months of the year. And, more importantly, they are clearly an indication that the market is in transition.
Exploring the factors driving the activity, as well as the present and forecast market environment, we believe the up-trend in leasing activity will carry over through next year.
First, there is more than 10 million square feet of leases rolling over before the end of 2010. That figure does not include leases smaller than 25,000 square feet, which is historically a segment of the market that accounts for about one-third of all leases.
Second, the value proposition has changed. Asking rents average $56 for Manhattan as a whole, down 21 percent from a year ago and 23 percent from the September 2008 peak. In the midtown Class A market, average asking rents are $66.46, down 24.7 percent from a year ago and 29 percent from the peak.
Due to the severity and duration of the recession, our expectation has been for the overall decline in average asking rents from peak to trough to be in the 35 percent range.
Whether that happens is irrelevant from a leasing-activity perspective, because major occupiers have already decided that we are at or very near the bottom and that there are opportunities to realize long-term value by locking-in leases at today’s favorable rates. If there are further declines in rents, that should serve as an even stronger catalyst for transactions.
This mind-set will motivate tenants with lease expirations in 2011 and beyond to consider early renewals. We’ve seen a wave of early renewals driving many of the largest leases this year.
In addition, in a downturn, there always tends to be a flight to quality. So we expect some tenants to take advantage of the opportunity to trade up to better-quality space or to a more desirable location.
Year to date, we’ve seen signs of this in the direct absorption rate, which is a measure of the net change in occupied space after tallying all the available space added to the market and all the space leased over a given period of time.
Through November, the direct absorption rate in midtown was negative 537,000 square feet, or roughly 0.2 percent of the midtown inventory. This compares with negative 307,000 square feet in midtown south, or 0.9 percent of the midtown south inventory. Downtown had negative absorption of 1.1 million square feet, which is about 2.2 percent of the downtown inventory.
While it’s not unusual for Manhattan’s largest submarket to attract the majority of leasing activity, the direct absorption statistics indicate that midtown-and its large inventory of newer product-is garnering a disproportionate share of activity, which is consistent with a flight to quality.
Another factor that will be a key driver of activity is available sublease space. There is still a fairly high amount of sublease space on the market today, but it’s starting to get absorbed. The third quarter of 2009 saw a 300,000-square-foot decline in available sublease space in Manhattan, the first quarterly decline in available sublease space since the fourth quarter of 2007. The declines continued through October and November, totaling an additional 100,000 square feet.
Based on what we expect will be an increasing scarcity of quality sublease space as we move through 2010, we expect companies to consider capitalizing on the economics of prime sublease opportunities before they’re gone.
Lastly, we expect the new year to deliver employment growth, the primary driver of leasing activity and positive absorption.
In November, U.S. employment in office-using industries increased by 59,000 jobs. This followed increases in employment in the same industries in September and October. New York City’s unemployment rate dipped in November to 10 percent, from 10.3 percent in October.
Since the recession brought such steep declines in employment, and companies have been operating with extremely lean budgets and staff levels, we now expect an improving economy and rising demand for goods and services to spur significant hiring activity in 2010.
This anticipated employment growth, combined with all of these other factors, suggest a sizable rise in office-leasing activity next year.
Bruce Mosler is co-chairman of the board of Cushman & Wakefield and a member of REBNY’s Board of Governors.