The adage goes that if the US catches a cold the rest of us are in for a severe bout of pneumonia. So when the Square Mile begins to mutter about the bottom of the market being close, it is a relief to look across the pond and see Wall Street making similar noises.
As in London, the office market in New York has faced tough times. But New York has had to deal with so much more than a global economic downturn. Although the market was already in decline at the time of the horrific events of 11 September, the damage wreaked both financially and on the city’s psyche dealt a crippling blow. A little more than two years on, Wall Street is hardly overrun with bulls, but there is a feeling that the bears are going into hibernation.
Sentiment can be a dangerous thing, but Richard Charkham, a managing director at GVA Grimley’s based in Manhattan, says there are numbers to justify New York’s optimism: “The stock market has been increasing steadily since March, we also have generally improved manufacturing numbers, and there has been a rebound for luxury goods.”
Karen Sieracki, a partner at BH2 in the City, agrees that there are cheery signs in New York. “Corporate cash flows are improving, combined with a strong revival in capital spending, and filings of initial public offerings in August hit their highest level since May 2002. The economy is picking up speed,” she says.
But there is a lot of ground to make up. In August employers unexpectedly slashed 93,000 jobs nationwide, when economists had been forecasting an increase of 12,000 jobs. It was the seventh consecutive month of job losses in the US, bringing the total number of jobs lost during that time to 595,000.
Upward movement
“If we don’t get job growth we are not going to have any upward movement in rents,” says Jimmy Kuhn, president of Newmark Real Estate. The financial services industry does, however, appear to be making headway. Almost 10,000 jobs were created in the sector during June and July, and employment has risen by 1.2% since. Most of the new jobs are countrywide, but New York has benefited from an increase of 1,700 people working in the city’s financial sector.
Charkham says he now expects the New York property market to reach the bottom by the first or second quarter of next year. “The real estate market always follows behind the economy, so if the stock market started going up in March, you can’t expect the real estate to improve until at least next year,” he says.
Market statistics appear to bear out this view. Overall vacancy rates for Manhattan remained stable in the third quarter of this year at 12.5%, unchanged from the second quarter and up only slightly from 12.3% at the end of the first quarter.
“Stability shows strength right now,” insists Ken Krasnow, senior managing director of Cushman & Wakefield in New York. “In particular, we are showing strength in the sublease market, which has seen a great deal of activity in recent months.”
The total amount of sublease space on the market continues to decline. At the end of the quarter there was 14.3m sq ft on the market, compared with 15m sq ft at the end of the second quarter and 16.3m sq ft at the end of last year. Tenant-marketed space in Manhattan now makes up 29.5% of overall availability, from a high of 37% at end-2001.
Conversion to residential use of underused office towers in lower Manhattan is also set to have an impact on availability rates. The federal government has made this an attractive option for developers by providing tax-free financing. Figures released by Cushman & Wakefield show 2,395 apartments being added to the 16,800 already in lower Manhattan. Projects still in the planning stage would add a further 3,020 units.
And much like London, New York’s investment market has continued apace, despite the sluggish occupier market. The recent sale of the GM building on Fifth Avenue set a record with its $1.4bn price tag. And there was no shortage of bidders for the property.
More than two dozen groups were vying for ownership. In the end, it was Macklowe properties, owned by developer Harry Macklowe, that won by putting down a non-refundable deposit of $50m.
Macklowe has paid $800 per sq ft, compared with a market average of between $300 and $400. And although most market watchers will attest to growing optimism about the New York property market, many think he has taken a gamble too far.
For the deal to be viable, tenants would have to be paying rents in the region of $100 per sq ft. With grade A rents at $60 per sq ft and set to fall a little further, many commentators doubt Macklowe’s decision to pay such a high price.
Needless to say, the new owner thinks differently. Although unwilling to comment directly, a spokesman for the company, Steve Solomon, says Macklowe knows exactly what he is doing. “We are anticipating rents in excess of $115 per sq ft, moving forward as leases expire in the near future. These rents will be achieved,” he insists. At present, the building is almost fully occupied and Solomon describes the tenant mix as “elite class A tenants”.
Resilient market supports optimism
While he will not comment on the wisdom of Macklowe’s purchase, Peter Riguardi at Jones Lang LaSalle in New York says he is right to have faith in the market.
“For the first time in a year and a half there are real signs of vitality and significant transactions being officially signed. Some big deals seem to have real legs and should happen in the first quarter of next year.”
Charkham shares that view. “There is definitely more activity now than six months ago, and I think there will be a rush to close deals before the end of the year.” He says that, as occupiers grow in confidence, many will try to pin down deals while the market is still soft: “This is a resilient market and we do see ups and downs, but that’s the reason every investor in the world wants to be here.”
