It’s time for a little crystal ball-gazing, keeping in mind one of my former boss’s favorite sayings: “He who lives by the crystal ball gets to eat shattered glass.”
The Manhattan office market closed 2013 with some interesting anomalies that will have an important impact on 2014:
- While total employment growth was very strong, job growth in the main industries that use office space was not. According to the Bureau of Labor Statistics, in the first 11 months of 2013 employment in New York City increased by 88,200 jobs. But employment in financial services, information (media) and professional & business services—the three major sectors that we sum into “office using” employment—only increased by 5,700 jobs.
- While leasing in Manhattan was the second strongest in the last decade, the vacancy rate rose from 9.4 percent at the end of 2012 to 11.0 percent at the end of 2013.Despite the rise in the vacancy rate, asking rents increased 6.5 percent.
The market shifts can be explained by one word: development.
In 2013, Manhattan saw approximately 4.0-million square feet of new office buildings completed, the largest volume of new construction completions since 2001. In a roughly 400-million-square-foot market, 4.0-million square feet represents 1.0 percent added to the vacancy rate. And the new buildings, which ask above-market rents, boosted asking rents.
A secondary reason for the softness of the Manhattan market has been the weak performance of the financial services sector. According to the BLS, in August 2011 there were 441,900 people employed in financial services in New York City and in November 2013 there were 439,100 financial services jobs. During a time when the city as a whole added more than 183,000 jobs, the financial sector shed jobs.
What does all this mean for 2014? I believe there will be higher vacancy rates early in the year as more new construction is completed. However, a stronger national economy and rising financial services employment should lead to an improving environment as the year progresses.
The consensus is that 2014 will be a much better year for the national economy as the uncertainty that has held back risk-taking by businesses is diminished and hiring accelerates. A stronger national economy will boost the local economy.
Uncertainty has also been a factor in the weakness of financial services employment due to the lack of clarity about how the Dodd-Frank law would work. That uncertainty was reduced in December with the passage of the Volcker Rule regulations.
I expect the combination of a stronger national economy and more clarity about financial regulation will lead to rising financial services employment during 2014 which, along with the improvement of the broader economy, will lead to a healthier Manhattan office market. It may take some time before the improvement kicks in, but I anticipate that by the second half of 2014 Manhattan vacancy rates will be falling and rents will be rising.
Let’s hope I don’t have to eat shattered glass.