As many economists try to speculate what will happen in the U.S. following the Brexit decision, what is clear is Manhattan’s office leasing activity is on the decline, according to various commercial real estate firms’ most recent reports.
Leasing activity, excluding renewals, dropped to about 13.6 million square feet in the first half of the year, down from nearly 16 million square feet in the same six months in 2015, and 17 million square feet between January and July 2014, according to Cushman & Wakefield’s second-quarter office report released at a market update event today.
Some experts say that companies are taking a wait-and-see approach regarding their real estate decisions.
“I think part of it was that at the start of the year global economic fluctuations and issues caused a general pause in the market,” Richard Persichetti, a regional research director at C&W, told Commercial Observer following the event. “Companies were slow to make decisions.”
And Avison Young’s second-quarter report shows that leasing activity in just April, May and June resulted in 5.6 million square feet of deals, falling from nearly 8 million square feet during those three months in 2015.
There are a multitude of reasons why firms aren’t look for additional offices or moving, including the U.K.’s June 23 vote to leave the European Union, the slowdown in the stock market at the beginning of the year and uncertainty around the upcoming general election, experts said.
“Ever since I got into the business, psychology has played such a big, big role in everything,” said A. Mitti Liebersohn, a president and managing director at Avison Young. “We have a couple of things affecting psychology right now. We have an election, where everyone is walking around saying, ’huh?.’ And we have Brexit.”
Other real estate players are claiming this year will shape up to be one of the best in recent times. Why?
The amount of square footage leased through renewals increased in the first half of this year, bolstering leasing velocity. Leasing velocity in Manhattan was about 19.5 million square feet between January and July, according to C&W’s Persichetti. To compare, velocity for all of last year was 33.5 million square feet.
“Yes, leasing activity has been down, but corresponding to that is that renewals have been up,” CBRE Vice Chairman Peter Turchin said. “It’s kind of a more interesting dynamic. So it’s not that velocity has been down. The nature of the velocity has changed.”
But tenants don’t appear to be moving into new or big spaces.
The fact that more companies are considering renewals at this time is an indication that many companies are worried the economy is slowing down and don’t want to make any big moves, Jeffrey Peck, an executive managing director Savills Studley, said.
“I think that we have been seeing a consistent slowdown in leasing,” Peck said. “Although the numbers may show that there is some leasing activity, we are seeing that many tenants are taking less space than they previously had occupied. So you may get decent leasing numbers, but when you look at the absorption, it’s negative.”
The net absorption in Manhattan for the second quarter was 301,684 square feet, compared with 916,583 square feet last year, according to Avison Young. The vacancy rate has remained virtually stagnant in the 9.5 percent range over the last couple of years, the brokerage determined.
Peck believes tenants are looking for ways to cut costs, which includes packing more people into “open” offices in smaller spaces. And, leasing in New York City is slowing down because companies are leaving Manhattan in search of cheaper rents.
As for the impact of Brexit, the stock market or the election, Peck said: “I think these are excuses that disguise the true reality, which is that there is an oversupply of space and more coming online, and not enough tenants to absorb that space. And tenants have a lot of other choices today. When you are looking at Long Island City, when you are looking at Brooklyn, when you are looking at Jersey City, [N.J.], these are becoming true viable, desirable, alternatives.”