2012 NYC Real Estate Market Forecast

Manhattan’s office market is likely to face a range of challenges in 2012.  The economy has yet to settle into a steady pace of sustainable recovery.  Some uncertainty is likely to surface in 2012 until the results of the presidential election suggest a probable direction.  In the meantime, employers continue to adapt to doing more with less.  New businesses are coming of age and will start to hire more and take more space.

As the epicenter of the global financial network, ever-changing events that flow through the international banking industry will have a direct impact on the city’s real estate market.  The local financial services community continues to shed jobs despite earning record profits. The NYC Comptroller estimation of a loss of 10,000 local financial services jobs would prolong this industry’s drag on the city’s economic recovery.

The spillover effect is predicted to be for every financial service job eliminated, a loss of two jobs will occur across an array of support services across the city.  If half of the spill-over jobs lost were in the office-using sector, total office job loss would reach 20,000 employees.  At 250 square feet per employee, Manhattan could result in a decrease of 5.0 million square feet of absorption, which in turn could push the availability rate up by as much as one percentage point.

In contrast, helping to offset the sluggish movement in the financial services sector, the technology and media industries are expected to continue to grow and expand in the city.  As a result, the city will probably experience slow, but steady economic growth over the coming year.  Contributing to the expectations of greater stability in 2012 is the growth of new businesses – especially in the technology and media sectors.  Historically, new firms average three to five years to gain momentum and begin hiring at a more rapid rate.  As small businesses account for 80% of new job formation, the maturing of the fledgling companies formed by employees who have lost their jobs a few years ago should give a boost to the local job creation activity.  The emergence of more active small businesses is already evident in the increased demand for small, pre-built space to accommodate firms in the under 15,000 sf range.

Business support services will provide some impetus for job growth – and office space demand.  Although this sector will probably lose some business related to the aforementioned expected financial services sector job shrinkage, its close ties to supporting the growing technology and media sectors should help to offset any potential job losses.  As a result, this industry sector should be a positive influence on both the city’s economy and its office market in 2012.
However, as employers are focusing on productivity enhancements, job creation will be slower than in the past.  Down-sized employees will continue to be less frequently replaced. Instead, their work will more likely be distributed among other workers or converted to a technology-based process.

In addition, the trend of employees being allocated less space in which to conduct their jobs is expected to become more the norm than the exception.  Square footage per employee has been on the decline for some time and alternative work strategies continue t gain in popularity.  Looking forward, these workplace strategies are likely to become much more commonplace.

It remains to be seen if a sufficient number of jobs will be created to offset those still being eliminated.  Furthermore, since many employers have already begun to reduce the average square foot per employee by approximately 25%-30%, many more jobs will be needed in the future to create the same level of office demand.  Frequently, recent leasing activity has been – and will likely to continue to be – tenants relocating in order to consolidate into more efficient space at tighter employee to square footage ratios.

Each submarket, is likely to face different issues, perform at different paces and have different drivers in 2012.

Midtown North: Healthy Outlook

At mid-November, the availability rate had dropped to 11.6% from 12.4% at the end of last quarter.  Leasing activity was 1.5 msf, slower to date compared to the pace of the last quarter.  Five large blocks of space have been listed in the recent weeks, the largest of which was 536,617 sf at 1221 Avenue of the Americas.  Interestingly, none of the large leases signed to date have been by traditional office space users, but by healthcare and retail uses.  These major transactions included Columbia Doctors at 1290 Avenue of the Americas for 121,477 sf, Beth Israel Medical Center’s renewal at 555 W 57th Street for 112,941 sf and Bloomingdales’ renewal  at 919 Third Avenue for 110,198 sf.  Class A average rent was $69.90, a minimal increase since the end of the third quarter.

Looking Ahead:
The availability rate will continue to hover at the current range during the first half of 2012, followed by a moderate decline in the second half of the year as the economy posts a modest increase in momentum and employers feel more comfortable implementing long-ignored business expansion plans.

Office space demand will be off to a slow start in the early months of 2012 as small business and relocations are the prevailing activity.  By mid-year, activity is likely to increase and be more represented by new leases and more frequent expansions.  Sublease space, already in short supply, will become even more scarce.  With little construction activity underway, space options will continue to shrink, encouraging increased construction planning activity and pre-leasing by space starved anchor tenants.  Rents, which have been slowly inching upward over the last several quarters, will see larger incremental increases – especially once the availability rate falls below the historic equilibrium range of 8.0% to 9.0%.

Midtown South: Active and In Demand

At mid-November, the availability rate had remained unchanged at 9.9% from the end of last quarter.  Leasing activity was 1.6 msf, up from the pace of the last quarter.  Four blocks of space of 50,000 sf and greater came to market since the end of the third quarter, the largest of which was 264,000 sf at 28-46 W 23rd Street.  Major transactions included Pearson PLC at 330 Hudson Street for 271,998 sf, and Tiffany at 200 Fifth Avenue for 57,691 sf.  Overall average rent was $48.09, a 5.2% jump since the end of the third quarter.

Looking Ahead
The availability rate will continue to drift downward throughout the year as technology and media firms as well as business service companies are expected to provide a steady stream of office space demand.  Rents will rise at a faster pace than in 2011 as office space demand outpaces the availability of quality, well-located office space supply.  Construction projects are likely to move more rapidly from the planning stages toward the ground-breaking stage.

Downtown: Gaining Momentum

At mid-November, the availability rate had dropped to 16.8% from 17.7% at the end of last quarter.  Leasing activity was 817,500 sf, up from the pace of last quarter.  Of the five large blocks of space listed quarter-to-date, the largest was at 1 World Financial Center for 152,780 sf.  Major transactions included MSCI, Inc. lease signing at 7 World Trade Center for 125,811 sf.  Class A average rent was $45.90, a 4.7% increase since the end of the third quarter.

Looking Ahead
Barring any more major space givebacks by the financial services sector, the availability rate should move downward throughout 2012.  Office demand is most likely to be modestly to moderately paced and be provided by business services as well as by the technology and media firms that cannot find appropriate space in Midtown South.  This submarket will continue to benefit from its position as the only new construction game in town.
Rents will slowly increase, but at a slower pace than those for Midtown North or Midtown South.

Across Manhattan, the tenant advantage enjoyed over the last several years will continue into 2012.  Eventually, greater balance between supply and demand will become increasingly more evident and will create a more level playing field between tenant and landlord.  Although rents will rise across submarkets, concessions are likely to remain in the 10% to 15% range.  The pace of construction activity at the World Trade Center site will provide a rejuvenation of th
e Downtown market.