3Q 2011 Market Update - Potholes on the Path of Recovery


The city’s economy stabilized during  Q3 but it is already bracing itself for a new round of layoffs on Wall Street.  Although NYC’s employment level dropped minimally for the quarter, it is 54,000 jobs ahead of a year ago and an 8.6% unemployment rate remains well below the National average.  For the quarter, total employment dropped by 4,800 jobs. In contrast to the rest of the nation, the government sector added 11,100 jobs over the quarter, while the private sector shed 15,900 jobs.  By industry, Business Services added 9,700 new jobs and Financial Activities employment grew by 5,300 jobs.  In contrast, Information shrank by 8,100 jobs.


It has been a tumultuous time for Securities Industry executives driven by a combination of weak markets, uncertainty over future regulations and the announcement of coming layoffs. The New York City Comptroller estimated that Wall Street could lose as many as 10,000 jobs by the end of 2012. The effect on the office markets will be a lessening of leasing activity, minimal growth and potential increases in real estate taxes to cover the shortfall caused by reduced profits on Wall Street.  

New York‘s office markets continued their recovery during Q3. The availability rate for Midtown North has continued its steady decline.  In contrast, the availability rate for Midtown South inched up while Downtown’s availability spiked sharply upward as several large blocks of space came to market.  Leasing activity wasn’t quite as impressive as Q2 but was still strong for the quarter.  There was positive absorption in Midtown North and Midtown South, but negative absorption again in the Downtown market. Rents have risen across all submarkets.

Downtown witnessed a dramatic increase in available space.  Merrill Lynch’s downsizing and Nomura’s relocation to Midtown placed 3.3 msf back on the market at the World Financial Center.  Once upgraded, the space will provide significant competition for the World Trade Center (WTC) and become one of the few large block availabilities in the submarkets. 

The two types of space that seem to be most in demand are large blocks of well located Class A space and smaller units of pre-built space.  Large blocks are already scarce, and smaller well-located short-term pre-built space is being taken up particularly by the venture-backed technology industry in Midtown South. For both types of space, there is very little sublease space and asking rents have increased despite an increase in the availability rate – suggesting that the type of space coming to market isn’t very desirable. For space in demand, Landlords are offering less generous free rent or tenant improvement concessions. 

Tenant interest has been strong across most the submarkets, but it is likely to slow during Q4 as companies take their cue from Wall Street and it will spill over into the first quarter of 2012.  Certain markets will remain tight – especially Midtown South.


Midtown North: Moving towards Balance

Midtown North continues to experience a reduction in available space and a slow, but steady increase in rental rates.  Leasing activity was strong for the quarter and absorption was positive.


*       The overall availability rate inched downward a notch to 11.6% from last quarter’s 11.7%, but was well below a year ago (13.4%)

*       The Class A availability rate (11.9%) fell moderately from last quarter (12.7%) and was 1.4 percentage points lower than a year ago (14.1%) . Dropping more sharply, the Class B availability rate (10.7%) decreased by 0.7 pp from last quarter's level and was 3.0 percentage points below a year ago rate (13.7%) .

*       Sublease space for Class A (3.0%) increased, while Class B (1.7%) sublease space declined for the quarter. Class A sublease was 0.8 percentage points below a year ago level (3.8%), while Class B sublease  was  1.6 percentage points below a year ago (3.3%).

*      The amount of available space has declined by 1.43 msf for the quarter and by 3.23 msf over the last twelve months. Five blocks of space of 100,000 sf or greater came to market during the quarter - three of which were in the Grand Central District.

Leasing Activity

*      At 5.81 msf, leasing activity decreased for the quarter, but was 23% greater than a year ago levels. 

*      While Class A activity (3.4 msf) was  41% below the previous quarter's pace, Class B activity (2.37 msf) posted a higher level (+72%) than in the second quarter and was well above (+30%) the year ago level.

*      There were 10 transactions of 100,000 sf or greater during the quarter, evenly divided between Class A and Class B buildings. There were five renewals, four new leases and one new/renewal.


*      Class A quarterly absorption was positive at 1.2 msf.  

*      Class B posted positive quarterly absorption of 230,000 sf.

Rental Rates

*      Overall asking rents increased for the quarter by 1.7% to $66.91

*      Class A rent rose for the quarter by 1.7% to $69.71. 

*      Class B rent increased for the quarter by 5.6% to $51.16. 


Midtown South: Market Lull

The Midtown South submarket posted a modest increase in its overall availability rate from last quarter.  The pace of leasing activity dropped from the recent past. The addition of several large blocks of space returned to the market pushed the availability rate upward. Overall rent rose, but absorption was negative.


*      Overall availability rate increased from 9.6% last quarter to 9.9% , but was well below the level of a year ago (11.2%)

*      The Class A availability rate (11.3%) inched up a notch compared to last quarter (11.2%).  However, it was 2.6 percentage points below the rate of a year ago (13.9%). 

*      The Class B availability rate (9.3%)  also rose from last quarter's level (9.0%), but has dropped by 0.9 pp compared to the level of a year ago (10.2%).

*      Sublease space has all but evaporated in this submarket - especially Class A space. However, the level of both Class A and Class B sublease space remained relatively unchanged from the previous quarter's level.

*      The amount of available space declined by 1.35 msf compared to a year ago, but only declined by 261,000 sf from last quarter.  Three blocks of space greater than 100,000 sf came to market during the quarter.

Leasing Activity

*      Leasing activity dropped for the quarter - posting a pace that was 14% below the previous quarter and 9% below a year ago.

*      Both Class A (630,000sf) and Class B (1.33 msf) recorded declines in activity for the quarter.  While Class A activity was greater than a year ago (240,000 sf), Class B leasing was somewhat slower than a year ago (1.74 msf).

*      Nine transactions of 25,000 sf or greater were posted for the quarter, seven of which were new leases and two were renewals. The transactions were evenly divided between Class A and Class B space, but were mostly direct space (7).


*      Absorption was negative for the quarter at -259,000 sf.

*      Class A posted a modestly positive pace of absorption (+13,000 sf).

*      Class B absorption was negative (250,000 sf) for the quarter.

Rental Rates

*      Overall rental rates ($45.55) rose (4.7%) for the quarter and was 3.1% higher than a year ago. 

*      Class A rent ($52.92) rose significantly (10.8%).

*      Class B rent ($42.78) also increased, but by much less - 2.2% compared to last quarter. 

*      Class A rent was 5.0% higher year-over-year and Class B rent was 7.2% higher than a year ago


Downtown: Spike in Availability Rate

The Downtown submarket posted a significant increase in its overall availability rate as 3.1 msf was placed on the market at the World Financial Center and 928,000 sf was listed at 375 Pearl Street (Verizon Building). As a result, absorption was extremely negative even though leasing activity was strong and overall rent rose.


*      Overall availability rate spiked upward to 17.7%% from last quarter's level of 13.0% and was well above the level of a year ago (14.5%).

*      The Class A availability rate (20.2%) rose sharply by 6.8 percentage points.  The Class B availability rate (10.9%) dropped from last quarter's level (11.6%) by 0.7 pp. The  Class A availability rate has risen by 5.6 pp from a year ago (14.6%).  The Class B availability rate hasfallen by 3.2 pp from a year ago.

*      The direct rate (16.1%) rose by 4.2 pp for the quarter, while the sublease availability rate (1.6%) remained unchanged. The direct rate has increased well below the year ago level (11.9%) and the sublease rate has remained unchanged.

*      Approximately 3.68 msf of space has been added to the market over the last three months.  Five large blocks of space were added to the Downtown submarket during the quarter.  The increase in space was greatly attributable to the new listing at the World Financial Center, which recently posted 3.1 msf for lease.

Leasing Activity

*      At 1.05 msf, leasing activity was relatively unchanged from last quarter and was minimally above the pace of a year ago.

*      At 790,000 sf, Class A transactions accounted for 75% of the quarter’s activity.  Class B posted 240,000 sf, or 25% of the quarter’s activity.

*      One transaction of 100,000 sf or greater closed during the quarter.


*      Quarterly absorption was -3.68 msf.

*      Class A absorption was negative for the quarter at -3.83 msf. 

*      Class B absorption was minimally positive at 15,000 sf.

Rental Rates

*      Overall rental rates ($41.74) rose moderately (9.2%) for the quarter.

*      Class A rent increased by (10.9%) to $43.85, Class B rent ($33.38) declined by 1.4%. 

*      Class A rents have risen above the year ago level, but Class B rent is below a year ago level.