NYC CRE Office Vacancy Skyrockets - Rents Plummet

Takeaways:
-- NYC Class A vacancies have doubled from 6.5% to 13%.
-- Lease rates have tanked from $150 to as low as $40-$50.
-- Subleasing is up to 40% of the available market
-- JPM is offering the largest sublet block, a whopping 400,000 sq ft at 277 Park.
-- I'm sure SLG will be up another 5% tomorrow.

May 27, 2009
SQUARE FEET
Manhattan is Awash in Sublet Office Space
www.nytimes.com

By J. ALEX TARQUINIO

Few office towers have been left untouched by the flood of sublet space that has recently inundated the New York office market. In Midtown Manhattan — where many of the world’s largest financial companies are headquartered — three out of every four office towers now have sublet space available.

Brokers say that many sublandlords will probably need to bend over backward to sublease their space, given the sharp rise in vacancies.

In Midtown Manhattan, for example, 13 percent of prime, modern, well-located offices — which brokers often refer to as Class A space — was available in April, up from 6.5 percent a year earlier, according to Colliers ABR, a commercial real estate services company. And sublets now account for some 40 percent of the space available in Midtown, compared with 30 percent of the much smaller total that was available a year ago, the company said.

In some cases, the ink was barely dry on the original lease before the space went back on the market for sublet.

For example, Dechert, a global corporate law firm, has completed one year of a 15-year lease for the 25th through 31st floors at 1095 Avenue of the Americas, a 41-story office tower between 41st and 42nd Street, overlooking Bryant Park.

When the firm moved in last year, it intentionally took an extra floor, which it planned to use for future expansion, and from the start it has had a subtenant on the whole 31st floor. But that sublease expires in July, and the subtenant does not plan to renew. Since last year, the law firm has also had several rounds of layoffs, and it needs less space.

Judith B. Tellefsen, the director of real estate and purchasing for Dechert, said the firm would like to sublet two floors, preferably lower floors, which are each 37,000 square feet. “We are only partially occupying the 25th and 26th floors, and we could easily consolidate those lawyers on other floors,” she said. Ms. Tellefsen said that the firm would be flexible, though, if a subtenant wanted the 31st floor instead.

For companies whose space is not as new as Dechert’s, there might also be a need to invest in improvements in order to make the space more marketable — or else give subtenants a generous work allowance to redo the space themselves.

“Sublandlords should be trying to make it as easy as possible for the tenant to move in,” said Mitchell Konsker, a vice chairman at Cushman & Wakefield. He said that space improvements could be as simple as reconfiguring the furniture or painting the walls. In other cases, Mr. Konsker said, sublandlords might need to split up a large block of space into several smaller blocks. “Smaller blocks are moving more quickly now,” he said.

Peter Turchin, an executive vice president at CB Richard Ellis, said that sublandlords should put their best space on the market — even if that meant moving their own employees into less desirable space.

In some cases, Mr. Turchin said, a sublandlord might even need to hire an architect to show tenants how an office could be reconfigured, especially if the space does not have a reception area or a conference room.

Mitchell S. Steir, the chairman and chief executive of Studley, a New York brokerage firm that specializes in representing office tenants, said some sublandlords were offering more generous work allowances than many building landlords were giving to new tenants.

Mr. Steir said owners were offering work allowances of around $65 a square foot, up from $35 to $40 a square foot a year or so ago. But he said some sublandlords were willing to go as high as $160 a square foot.

“Obviously, the sublandlords are not in the leasing business, so they’re not looking at a return on investment,” he said. “They are only looking at how quickly they can get the space off their books.”

But real estate experts say the main way sublandlords are competing with office space that is available directly from building owners — often within the same building — is by slashing rents.

Robert Sammons, the managing director in charge of research at Colliers ABR, said that sublet space in trophy office towers along Madison Avenue and Park Avenue has been leasing for as little as one-third of what that space might have commanded in early 2008, at the height of the roaring market.

“A year and a half ago, this space might have leased for $150 per square foot,” Mr. Sammons said, while he has heard of recent sublets in high-end buildings in this office corridor with annual rents of as little as $40 to $50 a r square foot. “This is the most remarkable turnaround in pricing that I’ve ever seen in such a short period of time.”

He pointed to several large blocks of sublet space that recently came onto the market along the stretch of Park Avenue north of Grand Central Terminal, where many large financial companies have their headquarters and many hedge funds and private equity funds have also set up shop.

In April, two financial companies began offering sublet space at 399 Park Avenue, between 53rd and 54th Streets: Citigroup listed the building’s entire third floor, and Legg Mason listed the entire fourth floor. Each floor covers more than 97,000 square feet.

This month, JPMorgan Chase listed a large sublet at 277 Park Avenue, between 47th and 48th Streets. It amounts to more than 400,000 square feet, covering the 13th to the 17th floors, and the 19th to the 25th floors of this 51-story office tower. This is the largest block of space currently being offered for sublet in Midtown Manhattan.

“A number of these blocks of sublease space are quite large, so it’s much more difficult to lease them,” Mr. Sammons said. “And a number of them have relatively short terms remaining.

“A lot of this space might end up going back to the landlord,” he said, “if the economy doesn’t turn around soon.”