Not since 2001 has the New York office market been in such bad shape. Taking into account all categories of office space, just over 19 million sq. ft. was leased at the end of 2008, on par with the 18.9 million sq. ft. of space leased seven years ago.
During a media briefing on the New York office market this week, Joseph Harbert, chief operating officer of Cushman & Wakefield’s New York metro region, said that compared with 2007 levels, leasing activity was down 19% in 2008.
The deterioration of demand translated into a vacancy rate of 8% for New York office space at the end of the year up from 5.7% at the end of 2007 on a total inventory of more than 395 million sq. ft. In some submarkets, the total vacancy rate is now higher than a 9% tipping point, which establishes an equilibrium level at which both tenants and landlords have equal negotiating power.
Space available for sublease rose to 8.2 million sq. ft., a 134% increase from the 3.5 million sq. ft. available at the end of 2007. This translates into a sublease vacancy rate of 2%. Subleased space now accounts for more than 25% of the market compared with 18% at the end of 2007.
Kenneth McCarthy, Cushman’s managing director of research for the New York metro region, said that one major factor that contributed to the decline in the New York office market last year was job losses. Nationwide, in the first 11 months of the year, 1.9 million jobs were lost, bringing employment levels to where they were two years ago. Considering that 40% of the jobs lost were in the office-using category, the reduction in employment contributed to a decline in demand for office space.
In New York, 26,000 jobs have been lost since the beginning of 2008. The New York office market began its decline in the middle of 2008 and a significant decline set in after November as turmoil in thesector started to take a toll.
In the financial services sector, employment levels peaked in March 2008 and 17,000 jobs have been lost since then. The New York City controller’s office estimates that as many as 175,000 jobs will be lost in the city during this down cycle.
In another measure of decline, as the credit crunch took hold in earnest, the level ofsales for 2008 was down 60% to $19.2 billion from $47.8 billion in 2007. The Cushman figures are based on closed sales on transactions of $10 million and higher.
Foreign investors were responsible for 39% of all the transactions closed last year compared with 12% in 2007. Private investors, who accounted for 65% of the sales volume in 2007, bought just 34% of the properties last year.
Price decreases on office properties over the course of 2008 have been estimated at 20% to 30%, compared with the market peak seen in mid-2007, but the actual figure is difficult to pin down considering the decline in sales activity following September.
Most of the sales in 2008 took place in the first half of the year. And more than half of the transactions were financed by the seller or through loan assumptions. Also, the sale of Macklowe Properties assets accounted for more than a third of 2008 transaction volume. The commercial real estate investment firm had to offload some properties acquired during the boom years in order to meet mortgage loan commitments as refinancing options dwindled last year.
In one positive sign, interested foreign capital is waiting on the sidelines, according to Harbert. “Institutional, foreign and opportunistic capital sources continue to track the market in Manhattan, waiting for the availability of, and opportune time to pursue, property offerings and note sales,” he said.
As the year progresses, a mixture of government stimulus and restructuring activity could help strengthen the office market, Harbert predicts. The government stimulus could result in more jobs being created and boost demand for office space. And restructuring of assets could result in a higher level of investment activity, which would in turn boost the transaction volume.