Jobs have come back since the layoffs of the recession in Manhattan but the office market hasn’t been able to recapture the rise in employment according to data released this morning by the real estate services company Cushman & Wakefield.
Though employment now exceeds even the last economic peak in 2007 in the city, vacancy has yet to fall to levels commensurate with that period according to C&W’s chief economist Ken McCarthy. Mr. McCarthy noted that overall vacancy in Manhattan in 2007 was around six percent while it has remained at or above nine percent over the past year – even as Manhattan has gained jobs.
“We’re right now at a new employment high and have surpassed the previous peak but there is something else going on in terms of absorprtion,” Mr. McCarthy said. “Businesses are clearly using space more efficiently. In the financial services sector, employment is up, 25,000 jobs have been added since 2010 and yet occupancy hasn’t grown, these companies are taking their existing footprint and using it more efficiently.”
Vacancy in Manhattan was nine percent at the end of June, down only slightly from 9.4 percent a year ago. The anemic drop reflects how, since the second half of last year, leasing activity in the city has fallen off. About 5.4 million square feet of space was leased during the second quarter according to C&W, down significantly from last year during the same period when 10.1 million square feet was leased. Last year’s second quarter was the strongest three month period of leasing in a decade, so the comparison is particularly stark, but this year’s second quarter was also below Manhattan’s 10-year quarterly average of about six million square feet of leasing according to C&W.
But deal flow is only part the issue as companies have taken space, driving activity measures, only to shed offices elsewhere, casting off net vacancy.
The quarter’s two signature transactions were examples of the trend. In April, Viacom inked a huge 1.6 million square foot lease at 1515 Broadway, an apparent expansion beyond its existing space at the property, which for years has served as the mass media company’s headquarters. But the corporation is expected to shed space elsewhere in the coming years and relocate those operations into 1515 Broadway in what will likely be a net reduction of the company’s footprint in the city, experts say. Morgan Stanley’s 1.15 million square foot renewal that same month at One New York Plaza is expected to play out similarly.
Mr. McCarthy said that continued job growth would counteract the negative absorption.
“How many jobs would it take to get back to six percent vacancy?” Mr. McCarthy asked. “The number is about 40,000 jobs. That would seem like a lot, but it’s really not. In the first five months of this year, the city added 35,000 jobs.”
With activity down and vacancy stagnant, rents have grown only moderately Manhattan wide. The average asking rent at the end of the quarter was $58.86 per square foot, about six percent higher than last year. Class A space rose less, by 5.2 percent year over year to $66.91 per square foot, suggesting that much of the rental growth has been felt in Midtown South, a market that has little Class A space but has become popular among booming sectors like tech companies and creative firms.