Articles
Commercial Rental Market
The New York City office rental market has taken the hits of the economy. As unemployment rises and the economy sinks lower, the needs of corporations for space in the city has seriously declined. Not only has the need for space decreased for new businesses, but the existing commercial tenants have relinquished their current space. Commercial tenants are seeking smaller space or vacating the city entirely.
It is no surprise that the following factors are keys to the decline in the commercial market: employment, construction, vacancy and rent.
Employment. Per the Fourth Quarter Market Update by Marcus & Millichap, payrolls in the five boroughs have dropped by approximately 4%. Leading into the fourth quarter, over 147,000 jobs have been lost. The white collar industries make up over half of the job losses to date. This has brought the current unemployment rate in New York to approximately 8%. It is projected that the job losses for next year could double that amount.
Construction. New office space and completed projects have provided approximately 2.8 million square feet of additional office space in Manhattan. An additional 5.2 million square feet is currently under construction. Additionally, the World Trade Center property should also provide even more commercial space to the City over the next few years.
Vacancy. As a direct correlation to the loss of jobs and additional space provided, vacancy rates have surged tremendously. Currently, the vacancy rate in Manhattan is over 12%. This is projected to increase even more rapidly in 2010. Tenants are unable to afford the Class A rents and the lower tier buildings are not faring much better.
Rents. With a rise in the vacancy, landlords have been forced to reduce the asking rents. Since the beginning of 2009, effective rents have dropped 14.5%. Further, with additional sublease space, many of the top tier buildings are being forced to drop their current rents just to maintain their current occupancy status. It is likely that the price per square foot will continue to decline well into 2010.
Another factor not to be overlooked is the sales trends within the commercial real estate market. The NOI, or Net Operating Income, of buildings has dropped considerably. This devalues a building to investors. Past buyers are staying on the sidelines. They are looking for the bottom of the market until they get back into the game. This has provided numerous opportunities for distressed sales. The previous investors have become the deed holders in many situations. They are merely looking to mitigate their losses and reduce any additional exposure they may have in a property.
Based on the above, the leasing market represents a true microcosm of the economy. Rents will continue to drop and vacancies will continue to rise until such time as more jobs are available. Until such time, landlords will be forced to reduce their pricing just to maintain occupancy. Other than opportunistic buyers, the commercial market looks to be in decline for rentals and purchases.