Weathering the Storm: 4th Quarter Leasing Saw Improvements
Karsten Strauss Jan. 8, 2013, 7 a.m.
Times of change and uncertainty are always worrisome for investors—fear takes hold, spending is called into question and valuations become unpredictable.
Mix an election season with the impending threat of a potentially devastating fiscal cliff, then throw in a destructive, rogue tropical storm named Sandy, and you’ve created an environment that is not conducive to a stellar business quarter for the commercial market.
However, thanks to tax law-motivated sales and retail—as well as a handful of big end-of-year leasing deals—the fourth quarter ended on a relatively positive note, despite a slowdown in leasing activity.
“When you’re in the midst of survival, you’re not necessarily thinking about closing the next real estate deal,” said Joseph Harbert, president for the Eastern region at Colliers International. “So the fact that we went through this quarter and survived a national election, the European debt crisis, the impending fiscal cliff and a hurricane—I think we did pretty damn well.”
In terms of square footage volume, leasing reached its highest point for the year in the fourth quarter. The three previous quarters showed an average of approximately 5.5 million square feet leased, while the past four months saw 6.5 million leased, due in large part to massive deals, including Microsoft signing a 230,000-square-foot lease for its new Midtown headquarters at 11 Times Square.
Other large transactions that pushed the fourth quarter into the realm of statistical success despite sluggish leasing activity included Kaye Scholer’s lease for 260,000 square feet of space at 250 West 55th Street, law firm Chadbourne & Parke’s 200,000-square-foot deal at 1301 Avenue of the Americas, Macy’s renewal and expansion at 1440 Broadway and the New York City Law Department’s lease of 131,946 square feet at 100 Church Street, among others.
“There’ve been only two years since 2006 where the fourth quarter was the highest quarter, and this year was one of them,” said Jonathan Mazur, director of research with Cushman & Wakefield, adding that the other was 2010.
“Subleasing, as a percentage of all space, fell in the fourth quarter—the lowest level in six months,” said Mr. Mazur. “There are indicators that are positive, but we still have a little ways to go before the market is firing on all cylinders like it was in ’06 or ’07.”
Despite the statistical boost from large transactions, Manhattan’s Class A availability spiked at 14.5 percent, according to figures released by Studley. That change can be attributed to new product in lower Manhattan as well as several significant blocks of space in existing properties that fell inside the 12-month availability window. In Manhattan, Class A office availability is now above the high point of the most recent recession—the highest level since the early 1990s.
Such availability—from which Midtown South seems to be immune—could draw pricing pressure, and landlords could lower rents to attract tenants, said Jeffrey Peck, senior managing director with Studley. “I think that pricing will either remain the same or you’ll start to see some landlords reach for deals,” he said. Though he could not be more specific for fear of disrupting negotiations, he said he already sees such a trend beginning.
Staring down the barrel of the economic uncertainty in an election year put a damper on brokers’ ability to close leasing deals in the fourth quarter.
“I think people anticipated that the fourth quarter was going to be somewhat stagnant because a large number of space-users were putting off decisions until they knew what 2013 was going to look like,” said Paul Glickman, a vice chairman with Jones Lang LaSalle.
Leasing velocity eased and pricing was flat in 2012, said Cassidy Turley Vice Chairman Richard Bernstein, whose firm moved more than 500,000 square feet in Manhattan during the fourth quarter (plus 50,000 in the outer boroughs).
“When there’s uncertainty about what the new policies are going to be coming out of Washington, business hesitates, funding hesitates, decision-making hesitates. It does cause the market to pause for a while,” he said.
In general, companies have become more conservative in their allocation of space per employee, opting to underscore the importance of common space in offices, reducing square footage needed and saving money.
Sandy’s impact on the market undoubtedly slowed and set back the completion of some deals, Mr. Harbert said.
“There were deals that were active, that were anticipated to close in the fourth quarter—both leasing deals and investment deals—and, truly, because of the storm, those deals have floated into the first quarter,” he explained.
On the retail side, retail king Robert K. Futterman didn’t notice much sluggishness during the fourth quarter—his company realized a significant leap over the prior year, especially during the fourth quarter of 2011.
“The whole year was good,” he said. “Our revenue ended up about 25 percent above last year … but there was a real strong push toward the end in Q4 to get leases signed, to get deals done, especially in the investment sales side, with the tax laws changing.”
Retailers’ attraction to Manhattan locations appears to have overpowered some of the conservatism inspired by the threat of economic uncertainty and flooding. “In the major core urban streets—which is our company’s focus—there seems to be plenty of demand, and Q4 was really a strong indicator of that,” added Mr. Futterman.
Political and economic uncertainties were, in no small way, drivers of activity in the investment sales category in the fourth quarter. The threat of higher capital gains taxes influenced many would-be sellers to place their assets on the market. “The artificial deadline created by our friends in D.C. really drove a lot of sellers off of the ledge,” said Dan Fasulo, managing director with Real Capital Analytics.
Preliminary figures show that $13.3 billion worth of property changed hands during the fourth quarter—$3.8 billion of it in retail space, buoyed by the sale of Kings Plaza and retail condos at 666 Fifth Avenue, the St. Regis and 6 Times Square, Mr. Fasulo said. The quarter represents the highest sales volume per quarter since the end of 2007—the peak of the market—and the first time retail sales outshone office sales, which clocked in at just over $3.5 billion.
“In the last 10 business days of the year, we closed almost 20 deals,” said Peter Takiff, chief financial officer at Eastern Consolidated.
Though Mr. Takiff would not discuss specifics, the deals that closed were a combination of contracts teed up that just happened to finalize in December and sales that were likely tax-motivated.
“If you look at our fourth quarter this year versus our other three quarters this year, our fourth quarter was about three and a half times the size—in dollar volume—of our third quarter; it was about double our second quarter and it was almost double our first quarter,” Mr. Takiff said.
As for what the future might hold, the next several quarters may not be as overtly worrisome as the fourth quarter of 2012 was, but other obstacles could have a negative impact on the New York markets.
“When business leaders are focused on an election, focused on the ramifications of a hurricane and floods, focused on what the government’s going to pass for the new tax laws and the fiscal cliff and how that gets resolved, oftentimes these decision-makers punt on making the decisions until there’s a little bit more clarity, and I think a lot of that now is behind us,” said Mr. Glickman.
What is in front of us is a contentious set of budget debt ceiling negotiations in Washington, D.C., said Sam Chandan, president and chief economist of Chandan Economics. Also, changes to tax policy and government spending could have a dampening effect on the market. “The kinds of anxieties that were being motivated by the fiscal cliff toward the end of the year, regrettably, will persist into 2013.”
Following debt ceiling negotiations and beginning-of-year jitters, the commercial markets could become more predictable. “By second quarter, we’ll see sales activity and leasing activity return to their trend rate of improvement. Both of those are modestly positive,” said Mr. Chandan.
Seconding Mr. Chandan’s prediction of an uptick in activity in the second quarter of 2013 is James Delmonte, principal and vice president of research at Avison Young. Mr. Delmonte noted that 2012 saw a number of large and early renewals. “I think that might continue, because inevitably the market’s going to go up, so if people want to lock in current rates, you may see more renewal activity in the first part of the year.”
“In the investment sales space, interest rates are still historically low—buildings are trading for very low cap rates, which means it’s an attractive environment for people to sell,” said Mr. Takiff, giving his prediction for the coming year. “On the other hand, New York City’s economy has been strong and there’s been a lot of activity converting to residential—the market is very tight.”
As for sales, Mr. Fasulo predicts numbers will settle back into the range of $6 billion to $10 billion per quarter. “The problems in 2013 will be more on the supply side than the demand side, which is as strong as ever, in my mind.”
“I’m an optimist at heart,” said Mr. Bernstein, predicting a strong 2013 despite concerns over the debt ceiling and woes within the financial services industry. “By year end, it may surprise some people that we may see 100 basis points come off the supply, and we may see some modest price increases as the market starts to get legs.”
- Sam Chandan
- Joseph Harbert
- 6 times square
- Jeffrey Peck
- 666 Fifth Avenue
- Cushman & Wakefield
- Richard Bernstein
- Jonathan Mazur
- Kaye Scholer
- 1440 Broadway
- 11 Times Square
- Jones Lang LaSalle
- James Delmonte
- Cassidy Turley
- 1301 Avenue of the Americas
- 100 Church Street
- Eastern Consolidated
- 250 West 55th Street
- Real Capital Analytics
- Chadbourne and Parke
- peter takiff
- Chandan Economics
- Robert K. Futterman
- Avison Young
- Paul Glickman
- Kings Plaza Mall
- Dan Fasulo
- Colliers International