NATION Vacancy Rates, Avg. Lease Rates
The negative trends that have plagued the Manhattan office market have slowed recently, as the market shows signs of near-stability.
Although the vacancy rate increased to 10.9% in the third quarter, up from 10.2% in the previous quarter, fundamentals indicate a market plateau for the short term.
Taking a closer look, Midtown vacancy has steadied at roughly 8.5% in the past five months, and has only risen 30 basis points since the start of the year. Midtown South posted a 13% vacancy rate the past two months, and although it has fluctuated throughout the year, vacancy has returned to its January level.
As predicted, downtown has been affected the most, as its vacancy rate has jumped to 15.2%, a 4.3 percentage point increase from the beginning of the year, with close to half of the space vacated in the third quarter.
The overall Manhattan asking rent has dropped 7.5% since the start of the year. But the decline slowed during the third quarter as asking rents fell by only 1.7%. Although Midtown asking rents consistently have declined this year, the market saw just a 0.69% drop this quarter.
Midtown South has fueled most of the rental deterioration this year, registering an 11.4% decrease year-to-date, but has shown improvement as the decrease has slowed quarter-to-quarter.
After holding strong for most of the year, downtown asking rents had a 4.1% decrease during the third quarter.
Consecutive drops in available sublet space over the months (the first time this has occurred in more than two years), suggests a redirection of market activity.
But the recent layoff announcements of 4,700 jobs at J.P. Morgan Chase & Co. and 1,750 job cuts at Credit Suisse First Boston Corp. indicates that there is another wave of large blocks of available sublease space coming to market. A possible balancing factor could be job growth in other sectors, as evidenced by the 3,600 jobs added in New York City in August.
The Midtown vacancy rate has held firm at 8.5% in the past five months and the rate of depreciation for asking rents has continued to slow, suggesting the market should remain stable through 2002.
Midtown South will continue to see a slight rise in vacancy and small drops in rent in the next three months. Downtown vacancy will continue to rise slowly, possibly reaching 16% by year-end.
But the next three months ahead could see more major layoffs on Wall Street. In addition to Credit Suisse and J.P. Morgan, Goldman Sachs Group Inc. plans to decrease their investment-banking workforce by 10%, and Charles Schwab Corp. is planning 1,900 job cuts. There also have been rumors that Merrill Lynch & Co. and Lehman Brothers Holdings Inc. may make a small number of cuts by the end of the year, too.
Although available sublease space declined in the third quarter, more job cuts will most likely add additional sublet space to an already saturated market.
The Manhattan office market appears to be at a plateau, but could see further softening rather than entering the recovery phase of the real estate cycle.
In the next few months, landlords should lock in tenants to early renewals to protect occupancy rates.
Small tenants should shop the market, seeking beneficial concessions and terms. Large tenants should look to take advantage of lower rents offered in a secondary market like Midtown South to decentralize operations as part of an overall risk reduction strategy.
Atlanta
The overall vacancy rate stands at 18.3%, the highest in a decade, and quarterly absorption was negative 567,450 square feet. Although a significant recovery is not expected until 2004, given Atlanta’s economic diversity and strength, it is expected to lead the nation into a recovery
Boston
Oversupply and weak demand characterize the Boston office market. The construction pipeline emptying and the pace with which sublease space is returned indicate that the real estate market is nearing the trough. We project that the vacancy rate will climb to 18.5% by year-end and hover at 18% next year.
Chicago
The office market has bottomed out which might be the best news that the Chicago commercial real estate community has heard in awhile. The vacancy rate has decreased from last quarter, combined with a positive overall net leasing activity of about 302,368 square feet, which is encouraging given that last quarter’s absorption was positive as well. Rates in both the central business district and suburban markets remained flat and sublease availability appeared to finally be stabilizing, although still substantial and very much an obstacle to full market recovery well into 2004.
Cincinnati
The growing amount of sublease space, especially in the northern suburbs, continues to fuel a tenant’s market. The smaller but historically stable Northern Kentucky market is also showing signs of weakening due to the large amounts of sublease space. In the business district, major tenants such as 5/3 Bank and Procter & Gamble are consolidating several offices, adding to the tenant’s market environment. With the demolition of the Cinergy Field garage under way, the shrinking supply of convenient, affordable downtown parking is an issue for many tenants.
Cleveland
Opportunities are abundant for tenants and this has prompted some big-sized companies to explore their options. For the first time in several years, the vacancy has dropped, in part due to Progressive Insurance’s expansion into 250,000 square feet of multi-tenant space in the east submarket. On the office investment front, low interest rates have prevented many sellers from taking properties to the market due to unappetizing price levels, despite the many buyers available.
Detroit
Corporate space consolidating and lease defaults seen in the past six quarters are coming to an end. Sublease space availability in the suburban market fell while increases in sublease square footage were seen in the business district. On a promising note economic indicators such as increased employment and corporate profits are hinting that the Detroit metro economy is beginning to stabilize. While vacancy rates should hold firm in the coming quarters, a recovery in the commercial office market is unlikely to occur soon.
Indianapolis
Extraordinarily slow, sublease market deep, sublease discounts strong, up to $5 to $7 per square foot off original value, those are deals getting done (up to 30% off of base lease). The slow grind of downsizing and subleasing continues without any immediate sign of relief. Rates have dropped just a little this quarter as it looks as though we may be approaching the bottom.
Kansas City
Demand will slowly start to rebound in 2003, but it will likely take about three quarters before significant growth is visible. Vacancy will continue upward for the next couple of quarters, although at a slower pace than what was seen in the past year, cresting somewhere around 23%. Economic conditions will gradually improve as the year progresses and the office market will follow its lead.
Miami
While there was some pick up in leasing activity this quarter, a combination of new construction and growth of sublease space sent vacancies climbing again to 15.6%. The bright spot was the investment market, particularly in the central business district where more than $500 million traded hands. Among the trophy properties sold this quarter were First Union Financial Center in downtown Miami and Barclays Financial Center on Brickell Avenue. They sold for $235 and $253 per square foot, respectively, setting new records.
New Jersey
The Northern and Central New Jersey class A availability rate is approaching 24% as the sluggish economic conditions continued to hit the office market. Sublease space has been a recurring theme this year. Consolidations by Lucent Technologies resulted in an additional 660,000 square feet of sublease space being released to the market. More than 10.9 million square feet of sublease space was available in Northern and Central New Jersey in the third quarter.
Omaha
The suburban market now has had two consecutive quarters of positive absorption. Concessions remain prevalent. Business district supply currently exceeds demand.
Philadelphia
A modest third quarter, ending with positive absorption and steady vacancy. While overall vacancy rates did not improve, the amount of sublease space coming into Philadelphia’s western suburbs slowed. The suburbs continued to see the construction pipeline grow, but well off of its most recent peak. In most markets tenants kept the upper hand as free rent, tenant improvement allowances and other concessions remained prevalent.
St. Louis
Vacancy rates continue to climb, largely due to sublease space and corporate consolidations. More than 1.6 million square feet is under construction, with 786,448 square feet still available.
Tampa Bay
For the second consecutive quarter, overall vacancy rates fell in the Tampa Bay office market, yet another sign that conditions are slowly improving. Because landlords are looking to maintain the value of their properties, asking rental rates for space has not changed much, but net effective rental rates have been cut by up to 10%. Opportunities for tenants are still abundant. The high-quality sublease space currently on the market is a simple, easy way to occupy space.
Washington, D.C.
The Washington area is split. Areas outside the Beltway (I-495) are continuing to see very little activity, falling rents and increasing vacancy. Areas inside the Beltway are feeling the same pressures, but are performing much better. Suburban Maryland posted excellent net absorption as a result of a couple build-to-suit projects delivering. Downtown Washington has a large amount of speculative construction under way. New demand related to the government and some law firms will be responsible for most of the large lease deals, but there will not be enough demand to keep vacancy rates from going up.
Wichita
Planned class A development along the Riverfront is the first in more than a decade in the business district. Class A occupancies remained strong during the quarter.
