Mortgage Crisis Minimally Impacts NYC Commercial Real Estate

Third Quarter 2007 Market Overview

Tenant’s Viewpoint

While recent economic factors have created a certain sense of unease, the commercial real estate market will remain a Landlord’s market for the foreseeable future, based primarily on the current short supply and high demand. Unless we see significant job losses in Manhattan we expect market conditions to remain steady. Many are watching for year end, post-bonus layoffs at the large financial services firms, which may start to trigger a softening of demand for office space. In the interim, many tenants are adopting a wait-and-see attitude and suspending or postponing any space searches not driven by schedule or lease expiration. “Move-in” condition space that does not require significant construction remains difficult to find, and landlords remain bullish in both their negotiating stances and pricing positioning. Security deposits are becoming more aggressive, particularly for hedge funds and start-ups.

Market Overview

The subprime mortgage crisis and subsequent credit crunch have yet to make an impact on New York City’s commercial real estate market, which historically has lagged changes in the financial sectors by about 12-18 months. With vacancy rates still at 5% for Class A space in Midtown, we continue to be in a Landlord’s market. Downtown continues to improve overall, and Midtown South remains incredibly strong at 3.8% vacancy. We have seen very slight increases in vacancy from Q2 to Q3 2007, but asking rents have continued to rise, indicating a continued bullish outlook by commercial landlords.

Trends & Statistics

Midtown
Midtown Class A vacancy rates increased slightly for the first time in over a year, from 4.6% in Q2 to 5% in Q3, yet the asking average asking rents also increased by $3.02 per rentable square foot (”rsf”) or 4.01% to $78.21/rsf in the same period. Class B vacancy rates also increased slightly from 4.1 to 4.3% (or by 8.5%) with an increase in asking rents of $7.38/rsf (or 15.8%) to $54.21/rsf.
Since Q3 2006, Class A vacancy rates have decreased 7.41% (from 5.4% to 5.0%) and the average asking rent has increased $14.97/rsf or 23.6%. Class B vacancy decreased from 4.7% to 4.3% (8.5%) and asking rents increased $9.29/rsf (20.4%). Q3 2007 net absorption was 550,979 rsf for Class A, with negative absorption of 211,951 rsf in Class B properties.

Midtown South (Class A & B)
Q3 vacancy increased from 3.7% to 3.8% from the prior quarter, with asking rents increasing $3.18/rsf (7.0%) to $48.86/rsf . A year ago (Q3 2006), vacancy was 5.3%. This shows a decrease of 28.3%. Asking rents in the same period increased $12.47/rsf or 34.3%. Midtown South no longer proves to be a value alternative as prices have risen commensurate with Midtown over the last year. Net absorption in Midtown South in Q3 was 158,229 rsf.

Downtown
2007 Class A vacancy reduced 23.4% from 7.7% in Q2 to 5.9% in Q3, with asking rents increasing $3.35/rsf (6.96%) to $51.48/rsf. Class B also improved from 9.4% vacancy in Q2 2007 to 8.3% (11.7%). Asking rents improved 3.27% (or $1.39/rsf) to $43.88/rsf. A year ago, Class A Vacancy was 10.6%, and class B was 10.4%. Asking rents were $44.80/rsf and $32.13/rsf, respectively. This shows a 23.4% reduction in vacancy for Class A (11.7% for Class B) and an increase of 7.0% (Class A) and 3.3% (Class B) in asking rents.

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