NATION OFFICE MARKET
NEW YORK
Although the vacancy rate rose 10 basis points in the first quarter, optimism that the Manhattan real estate market is improving is in the air.
Demand for space is coming alive as available sublease space continues to diminish,down 26% from five quarters ago. Landlords, sensing the uptick in leasing velocity, have been slowly nudging asking rents higher the last two quarters,primarily in midtown and midtown south.
Concessions being offered are down slightly and now average five months of free rent and $28 in tenant improvements, compared to the six months of free rent and $34 in tenant improvements offered last year at this time.
Vacancies in midtown and midtown south dwindled by the end of the quarter, but overall Manhattan gains were offset as downtown suffered a minor setback when 656,810 square feet were vacated.
This past quarter alone three large tenants moved out of their spaces downtown: Lehman Brothers moved out of 351,000 square feet at 1 World Financial Center (scheduled to be occupied in the third quarter by Cadwalader, Wickersham & Taft), Dresdner Kleinwort Wasserstein vacated 227,912 square feet at 75 Wall St. and Moneyline left its 84,294-square-foot space at 233 Broadway.
With a vacancy rate downtown now at 13.9%, landlords continued to drop asking rents. Rents decreased 2.9% to $33.80 this quarter, the lowest they have been in more than five years.
Challenges
As available sublease space continues its downward spiral, and demand comes alive, landlords will continue to test the market’s capacity by raising asking rents.
Although landlords are still offering attractive concessions, the average free rent and tenant improvements offered are down from last year.
In the next two quarters, tenants who have lagged in making real estate decisions should start to lock in deals since asking rents seem to have bottomed out. Renewals continue to be an option before the market makes a full recovery.
2004 may be the last window of opportunity to take advantage of low rates and generous concessions.
Forecast
Economic indicators have started to pick up again. The gross city product grew 2.2% in the fourth quarter last year, the first upward movement since the third quarter of 2000.
Without growth in gross city product, companies do not need office space. The New York City labor force has been gaining momentum with the addition of 27,000 jobs in the past two quarters.
The pickup in demand in midtown during the first quarter likely will continue in the next six months. Of the 1.9 million square feet of new construction that was reported unleased last quarter, a little more than half has now been preleased.
This will keep midtown from being inundated with new space once these construction projects are delivered. Vacancy in midtown south has flourished the past 12 months and should begin to plateau in the next six months.
The downtown market could experience extended softening in the next three to six months as an additional 700,000 square feet of space is set to hit later this year.
CHICAGO
The Chicago central business district office market and the outlying suburban office markets have finally begun to stabilize and even improve in some areas.
Recent national office vacancy reports point to preliminary declines overall in the office vacancy rates as companies add slightly to their payrolls and fewer new office buildings come on to the market.
The Chicago office markets are following this settling, though not nearly at the rate most would like. Overall vacancies in the central business district remain sluggishly centered around 16% while suburban vacancies slowly creep even higher to almost 25%. The national average is about 17%.
Corporate profits, a leading indicator of job creation, are showing signs of improvement in Chicago as companies remain focused on productivity gains and boosting output to generate positive profits.
Regretfully for the Chicago commercial office market, most area companies are meeting these productivity gains without taking on new workers.
Since September, the national economy has generated 759,000 new jobs, including a robust 308,000 jobs in March. But employment remains nearly 2 million below its peak.
Still, the outlook for Chicago job growth remains upbeat in some areas. A recent study commissioned by the Mayor’s Office of Workforce Development shows that 21 industries and 31 occupations in Cook County are expected to grow by more than 3,000 jobs between 2000 and 2010 (even though at this current report we are almost halfway through the time frame projected and still waiting to really see these forecasts clearly impact the area).
According to the study, business services alone will grow by more than 140,000 jobs in areas such as accounting, computers and security. Other significant growth, with employment of more than 24,000 people, will take place in the restaurant and bar industry.
Yet both the central business district and suburban office markets still are experiencing soft leasing conditions because of too much supply and lackluster demand.
Most tenants are renegotiating current agreements, remaining where they are as they elect to leverage soft market conditions in their favor.
Despite soft office market conditions and hiring, Chicago continues to be a large import market as well as known transportation center, which is helping the commercial markets to some extent. With more broadband infrastructure in place than most cities, the majority of the nation’s internet traffic continues to move through the Chicago-based networks.
Forecast
Job growth continues to remain the main factor in Chicago’s economy. The office market will sustain improvement once demand and leasing activity picks up.
Based on Bureau of Labor Statistics’ February data, Illinois ranks in the bottom five in the past year in job loss at 43,500. With modest job creation in 2004, expect leasing activity to increase slowly as the year progresses.
Rents in even the most desirable buildings could begin to rebound as early as the second half of the year as landlords, fortified by newly signed leases, pull their most generous concessions off the table.
The market will favor tenants for the next three years, but tenants should act in the first half of 2004 to be assured of getting their best deals.
