November 26, 2008 by jack petrie.

Companies Advised to Be Patient and Prudent—and Not Panic

The meltdown of capital markets is beginning to shake up the commercial real estate market in Manhattan.  While some areas of the country are more vulnerable than others—especially metro centers like New York City with large financial institutions—all sectors of the economy are taking a hit. And while the bailout may start to provide relief as the government purchases troubled loans, this process will likely take an extended time, and the prevailing feeling among corporate real estate executives will continue to be uncertainty.     

How bad is it?  That is debatable, but certain dynamics are clear.

With some companies shutting down and many others forced to cut back, the unemployment rate is going up.  Unemployment in Manhattan is rising and job layoffs in companies in the financial services sector will take their toll.  Layoffs will result in space disposition, and we are already seeing large amounts of sublease space coming online.  Within the last couple of months, several large blocks (>100,000 square feet) have been listed in Manhattan, and this may be the tip of the iceberg.

This will lead to rising vacancy levels, negative absorption, and declining rental rates.  In short, we have the signs of a prolonged recession—or worse, if the bailout doesn’t work.

Yet, despite this seemingly bleak forecast, most landlords are still projecting an air of confidence.  They say that the New York City vacancy rate remains one of the lowest in the country and rents remain the highest.  Statistics, they say, don’t lie, and landlords are hoping their tenants won’t question them.

The Real Pulse

The truth is that statistics are much better at recording the past than reflecting the present and forecasting the future.  In fact, conditions on the street today will not be reflected for one or two quarters.  But landlords and their brokers know the score: 

1. Velocity is down dramatically, and we expect this to continue through next year.
2. Companies are shedding more space, and we forecast that vacancy will climb an average of 2-4% over the next two quarters.
3. Asking rents are now down an average of 20% in the last quarter. Rents will likely continue to decline for another two quarters before the market levels off.
4. Venture capital investments have dropped substantially, and commercial mortgage-backed securities are completely stalled.
5. Sales in commercial real estate have declined about 90% this year, and limited trading is expected as long as financing remains hard to secure.
6. Limited new inventory is expected to come online, with fewer existing construction projects and virtually no new building anticipated. 

But before we push the panic button, let’s put this meltdown in perspective.  Yes, this may be the worst credit crisis since the Depression, but what’s happening now is in fact an inevitable market correction that has parallels to the subprime housing debacle.  In both the residential and commercial real estate markets, loans have been awarded for much more than the properties were worth, and now banks are trying to unload bad loans while there seems to be no buyers. 

Still, the mess in the commercial market is not nearly as pronounced as it’s been on the residential side.  In the typically stable commercial market, there is much less supply and many more income sources.  In general, landlords can still generate enough cash, and defaults are low, though values are declining and pressures are mounting for landlords and investors to maintain their assets.

The Silver Lining

So what is our advice to tenants during these unsettled times?  We are counseling them to be deliberate and strategic.  Indeed, companies can find a silver lining in today’s volatile economy if they do the following:

• Exercise greater control.  It’s now (or becoming) a tenants’ market, which gives companies more leverage in dealing with landlords who desperately want to hold onto credit-worthy tenants.  Tenants should keep this in mind as they consider negotiating new lease terms like expiration rights as well as new tenant improvements and additional concessions.  Companies with leases approaching expiration should determine what assets they want to hold onto and what they might dispose. Companies with longer-terms leases may want to consider disposing space, especially if they face job layoffs. And all companies should make sure that decisions on short vs. longer term leases are aligned with their business plan.   

• Protect the bottom line.  It’s now more critical than ever for companies to protect their assets and cut costs.  Real estate remains the second greatest corporate expense, following payroll, and the risks today are enormous.  In considering cost-saving measures, tenants should note that if they negotiate directly with landlords (as opposed to outsourcing to service providers), they may overpay by about 20%.  And they can save more by partnering with a tenant advisory firm that exclusively represents them, not landlords.

• Think strategically and long term.  Another way to save in the long run is to make modest upfront investments in strategic planning and project management.  By working with project managers, companies can reconfigure their space and improve productivity.  This is particularly important to companies that may need to downsize or “right-size.”

• Ask about conflicts of interest.  Landlords wary of their cash flow are now putting enormous pressure on brokers to close deals. This can be problematic to tenants when they consider that brokers from traditional firms (which represent tenants and landlords) cannot adequately serve two masters and avoid conflicts of interest.  Especially in this environment, tenants need to ensure that their broker is putting their interests first. 

The Changing Landscape

To be sure, tenant rep firms and traditional firms are colleagues that work together. But the tenant rep model is gaining traction during this time as companies realize how much is at stake. Increasingly, we encourage companies to apply due diligence in selecting a brokerage firm, considering variables such as the firm’s financial stability. In this light, the plummeting stock of some of the largest publicly traded real estate providers may be cause for concern.  Public companies are also beholden to the stockholders, not the tenant.

Another concern is that many real estate firms have recently merged in attempts to bolster their revenue. But what’s good for a brokerage’s bottom line may not be good for tenants, and companies may want to consider the advantages of partnering with non-biased, independent advisory firms.

In the final analysis, we are telling tenants that we feel their pain.  Their fears of the unknown are partly justified because no one knows exactly how the bailout will play out. But we do know that this is a time for patience and prudence, not panic. The meltdown is a reality, and we may now be witnessing just the tip of the iceberg.  But commercial real estate is built on a firm foundation, and we can take steps to weather the storm.

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July 3, 2008 by jack petrie.

Second Quarter 2008 Market Update

Tenant’s Viewpoint

We expect the market to continue to soften over the next 12-18 months as more space is placed on the market for sublease and landlords will be far less likely to recapture space. This competition will ultimately affect landlords as they struggle to keep tenants who are willing to relocate. For those tenants looking at renewal alternatives, this period of unrest could present a significant opportunity. Tenants should do their planning early to prepare them for opportunities as they arise.

Market Overview

The commercial real estate market is showing the initial signs of weakening as economic news remains negative. Landlords continue to maintain high asking rents, but we are beginning to see greater concessions and more negotiability in lease transactions. Significant amounts of sublease space are expected to be put on the market. In the Grand Central area alone, we can identify over 1,000,000 rentable square feet (”rsf”) which will come to market shortly. This large addition of inventory will have a ripple effect throughout the midtown market and beyond. Vacancy rates have increased slightly in all areas except Downtown class B which improved marginally.

Trends & Statistics

Midtown
Midtown Class A vacancy rates increased from 4.7% to 5.0% in the last quarter. Asking rents for class A remained relatively flat at $84.11/rsf. Midtown Class B vacancy increased slightly to 4.5%, with a slight reduction in asking rents to $53.17/rsf. Q1 net absorption was negative for both Class A (-505,027 s.f.) and Class B (-186,695 s.f.)

Midtown South (Class A & B)
Vacancy of combined Class A and B space increased for the first time to 4.4% with asking rents remaining relatively flat at $54.41/rsf. For the first time in a long period, net absorption in midtown south was negative (-115,025 s.f.)

Downtown
Class A vacancy increased from 4.7% to 5.9% with a slight reduction in asking rents from $52.94/rsf to $52.62/rsf. Negative Net absorption for the second quarter was relatively high at -663,753 s.f. Class B experienced a slight drop in vacancy from 10.1% to 10% and an increase in asking rents from $47.41/rsf to $48.36/rsf. Downtown Class B was the only submarket with positive absorption for the quarter (54,269 rsf.)

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June 18, 2008 by jack petrie.

First Quarter 2008 Market Update

Tenant’s Viewpoint

Asking rents are expected to remain flat over the next few quarters. More sublease space will come on the market and landlords will be more reluctant to exercise their recapture rights. Recent economic events have produced sufficient uncertainty to change landlords’ attitudes towards deal making. Incentives to tenants are on the rise and landlords will increasingly be motivated to get a transaction done. This is welcome news for tenants with requirements over the next 2-3 years. There is a window of opportunity that tenants should be looking to take advantage of.

Market Overview

The level of unease in the New York City office market is increasing in light of the layoffs on Wall Street and the recent collapse of Bear Stearns. Further job losses are expected and this will check the demand for space and put more sublease space on the market. Tenants are rethinking their plans and, in some cases, are withdrawing from transactions or major commitments. However, the statistics are slow to react: Class A space vacancy in Midtown increased only slightly whereas Class A space vacancies in Midtown South and Downtown actually decreased in Q1. There were negative absorptions in all submarkets except Midtown South and Downtown.

Trends & Statistics

Midtown
Midtown Class A vacancy rates increased from 4.5% to 4.7% in the last quarter. Asking rents for Class A space continued to increase to $84.46 per rentable square feet (rsf). Vacancy in Class B midtown space increased from 3.9% to 4.3%, with asking rents barely increasing from $53.81/rsf to $53.97/rsf. Q1 2008 net absorption was -355,632 rsf for Class A space, the first negative absorption in quite some time. Class B absorption was -258,529 rsf.

Midtown South (Class A & B)
Q1 vacancy decreased nominally from 4.0 to 3.6% from Q4, with asking rents increasing $0.41/rsf (0.8%) to $54.26/rsf. Net absorption in Midtown South was still low at 9,822 rsf, a reflection on extremely limited availability in the submarket and lower activity in light of current economic conditions.

Downtown
Class A vacancy dropped by 11.3% from 5.3% in Q4 to 4.7% in Q1, with asking rents increasing slightly ($0.48/rsf) to $52.94/rsf. Class B vacancy increased marginally in Q1 2008 to 10.1% from 9.0% in Q4, but asking rents climbed at a slower pace than the prior quarter — only 1.5% to reach $47.41/rsf.

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February 14, 2008 by jack petrie.

Fourth Quarter 2007 Market Overview

Tenant’s Viewpoint

Continuing uncertainty in the financial markets coupled with announcements of job cutbacks have quelled the surge that commercial real estate experienced over the last year. We expect this pause to continue through 2008 as the financial services industry continues to write down losses from the credit crisis. Tenants contemplating renewal or relocation should consider taking advantage of this window of opportunity before the uncertainty stabilizes and landlords and sublandlords regain their market bullishness.

Market Overview

The tide of sentiment about the strength of the New York City Office Market has ebbed even though the statistics remain strong. As more reports of job losses are published, we would expect to see this trend in confidence continue. Class A space in Midtown remains strong with a vacancy rate of 4.5%. Class A space in Midtown South and Downtown are also showing no signs of weakening, due to limited supply. The big winner in 2007 on absorption was Downtown Class A space which reduced its vacancy by almost half, absorbing 3.2 million rentable square feet (”rsf”) in comparison to 2.7 million rsf in midtown Class A space. Overall, there now appears to be less competition for space, and we see the first signs of landlords being more negotiable.

Trends & Statistics

Midtown
Midtown Class A vacancy rates decreased from 5% to 4.5% in the last quarter. Asking rents for Class A space continue to increase, now $83.32 per rsf. Vacancy in Class B midtown space improved to a new low of 3.9% from 4%, with asking rents decreasing slightly from $54.95 to $53.81 per rsf. Since Q4 2006, Class A vacancy rates have decreased 13.46% (from 5.2% to 4.5%) and the average asking rent has increased by $15.87 per rsf or 23.53%. Class B vacancy decreased nominally from 4% in Q4 2006 to 3.9% and asking rents increased $11.04 per rsf (or 25.81%). Q4 2007 Net absorption was 927,873 rsf for Class A space, almost 70% higher than Q3 2007. Class B absorption did an “about face” with positive absorption of 282,572 rsf (compared to the previous quarter which had negative absorption of 211,951 rsf).

Midtown South (Class A & B)
Q4 vacancy increased once again nominally from 3.8 to 4% from Q3, with asking rents increasing by another $4.99 per rsf (or 10.21%) to $53.85 per rsf. A year ago (Q4 2006), vacancy was 20% higher at 5%. Asking rents in the same period increased $13.80 per rsf or by 34.46%. Midtown South has continued to remain tight in light of the premium cost of space in Midtown. Net absorption in Midtown South in Q4 was quite low at 29,585 rsf, a reflection on the very limited availability in the submarket.

Downtown
Class A vacancy reduced by 10.17% from 5.9% in Q3 to 5.3% in Q4, with asking rents increasing only slightly ($o.98 per rsf) to $52.46 per rsf. Class B vacancy increased marginally in Q4 2007 to 9% from 8.3% in Q3, but asking rents continued to climb by 6.45% to $46.71 per rsf. A year ago, Class A Vacancy was 10.3%, and class B was 10%. Asking rents were $45.27 per rsf and $36.38 per rsf, respectively. This shows a massive 48.54% reduction in vacancy for class A (10% for class B) and an increase of 15.88% (Class A) and 28.39% (Class B) in asking rents.

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October 19, 2007 by jack petrie.

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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September 5, 2007 by jack petrie.

Tighter Mortgage Market Demands Lower Risk Profile
by Shawn Gilreath & Jeanne St. John of CresaPartners

The implosion of the sub-prime residential lending market has been well covered by the media in recent months with the collapse of Ameriquest, New Century, Novastar, Ownit, Mortgage Lenders Network USA and many others. This drop in the residential debt marketplace also has caused repercussions in the commercial mortgage markets.

In May, two of the five groups that were buyers of the lower grade levels of commercial mortgage backed securities debt stopped buying these debt tranches. Seeing the devastation in the sub-prime market, bond rating agencies are requiring higher subordination levels and have begun lowering ratings on commercial mortgage backed securities bonds.

Commercial mortgage backed securities investors are now demanding lower risk profiles from securitization programs and requiring higher returns in order to compensate for the increased risk. Some of the demands to reduce risk include increasing debt service coverage, increasing amortization and reducing loan-to-value. This tightening in the market is already trickling down as stricter financing terms and higher interest rates on new loans to property owners. Commercial mortgage backed securities woes are being further compounded by treasury yields rising to their highest point in five years. Perhaps hardest hit will be property owners who purchased real estate in recent years, used floating rate debt and assumed that generous debt programs and low rates would be available for several more years. For companies occupying real estate, this shift in the commercial mortgage backed securities market may have dramatic adverse results.

A large amount of capital was allocated this year for real estate investments. Most market players agree that less capital will be available in 2008 and the dollars that are allocated will require higher rates of return.

Companies considering a sale/leaseback or other transactions in 2008 should consider executing those strategies now, while there is a surplus of capital.

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August 15, 2007 by jack petrie.

2nd Quarter 2007 Market Report

Tenant’s Viewpoint

With no indication of weakening in any of Manhattan’s submarkets, landlords continue to maintain their tough negotiation stances. Fewer spaces in good condition are available, thereby increasing tenants’ overall costs via capital costs required to build out space. The gap between Midtown Class A and B asking rents increased from $17.02 per rentable square foot (”rsf”) in the first quarter of 2006 to $28.55/rsf today, indicating continued strong demand for prime buildings. Downtown Class A rents appear to be leveling off (although a $75/rsf asking rent was spotted recently) while Class B asking rents continue to climb. The significant increase in both asking rents and absorption in Midtown South are evidence of tenants searching for more economical space, which is increasingly difficult to find. Tenants need to plan early and be prepared to act when the right opportunity appears, and tenants with significant financial restrictions (such as non-profit entities) may be forced to expand their search to fringe submarkets (Northern Manhattan) or outside of Manhattan entirely (Long Island City, Brooklyn).

Market Overview

The New York City Office market continues to boom with no signs of softening. Midtown South, often considered a value alternative to Midtown, now has the lowest vacancy rate of the three submarkets. Significantly lower absorption throughout Manhattan (1,280,662 rsf, down from 2,867,256 rsf in Q1 2007) suggests fewer relocations and more renewals. The New York City Office of Management and Budget projects that office rental rates per square foot will rise to $93.26/rsf by the year 2011 as compared to today’s overall average of $65.32/rsf. With increasing asking rents and the prospect of any new development being absorbed quickly into the marketplace, there is no relief in sight for the cost conscious tenant.

Trends & Statistics

Midtown
In the second quarter of 2007, Average Class A office rents rose another $3.98/rsf (5.57%) to $75.38/rsf from Q1 2007. The asking price for Class B space increased by $2.39/rsf (5.28%) to $46.83/rsf. Class A vacancy rates remained stable at 4.6%, while Class B vacancy increased marginally from 4.0 to 4.1%. In Q2 2007, Class A net absorption was 48,926 rsf and Class B net absorption was 67,650 rsf.

Midtown South (Class A & B)
Average asking rents rose a staggering 8.25% to $45.68/rsf in Q2 2007. Vacancy in Midtown South dropped from 5% to 3.7%. Net absorption was 552,126 rsf, up from 225,724 rsf in the previous quarter.

Downtown
Asking rents for Downtown Class A space rose far more slowly, 2.82% to $48.13/rsf, while Class B asking rents rose 6.3% from the previous quarter to $42.49/rsf. A year ago there was a $10.45/rsf differential between Class A and B space Downtown. In Q2 2007 that difference reduced to $5.64/rsf. Class A vacancy dropped from 8.2% to 7.7%, and Class B vacancy reduced from 10% to 9.4%. Total net absorption in Class A was 669,835 rsf, while Class B absorbed 77,425 rsf.

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June 7, 2007 by jack petrie.

A short while ago, I wrote about the excitement of negotiating leases in some of the landmark and iconic properties that comprise much of the Manhattan’s commercial real estate market. Last week, I was asked to comment on one such iconic property, The Woolworth Building, by Alison Gregor of the New York Times.

An Icon on the Cusp of Lower Manhattan

While not as well known as the Empire State Building or the Chrysler Building, perhaps because of its Downtown location (between Barclay Street & Park Place), Woolworth is still architecturally and historically significant.

I’ve never worked in the Woolworth Building, but I did have a large corporate client that routinely included it on any building tour for any of the company’s subsidiaries, of which there were many. Don’t ask me why, but here are some possible reasons:

Woolworth Building Factoids

• The Woolworth Building, while constructed in 1913, remains one of the 50 tallest buildings in the U.S. and the 20 tallest buildings in NYC;
• It’s one of less than 2,500 National Historic Landmarks (a designation by the U.S. Secretary of the Interior) and therefore, on the National Register of Historic Places;
• The building was designed by architect Cass Gilbert, who worked for legendary NYC firm, McKim Mead & White;
• The Woolworth Building was immortalized in Alfred Steiglitz’s photography, which at the time, helped elevate photography to a “fine” art;
• Bas reliefs in the building lobby depict Woolworth, Gilbert, as well as the building’s engineer and leasing agent. In Woolworth’s depiction, he is holding nickels and dimes;
• The building eclipsed 1 Madison Avenue (MetLife Tower) as tallest building in the world in 1913, only to be eclipsed by 40 Wall Street (Trump Building) in 1930;
• The property was owned by the F.W. Woolworth Company for eighty-five years when the successor entity, Venator Group (now Foot Locker) sold the building to present owner, The Witkoff Group for $155 million.

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June 4, 2007 by jack petrie.

In Wednesday’s (5/30/07) New York Times, an article appeared by Alison Gregor on the potential of converting downtown properties (like 233 Broadway, the Woolworth Building), into high-end, “boutique” office buildings, like some of the higher priced examples in Midtown.

Candidates for Boutique Buildings

The primary candidates for high-end (and high priced) office space are certain types of financial services firms, namely private equity firms and hedge funds. I know this from experience, having recently represented sublease space in one such “boutique” building, 712 Fifth Avenue. The asking rental on this sublease was $125/rentable square foot (”rsf”), which was derived from the landlord’s asking rental ($140/rsf) for comparable locations in the building.

When prospective tenants and their brokers inquired about the space, it became immediately apparent that there are two categories of tenants looking for space in Midtown: those with a budget (usually under $100/rsf) and those with no budget.

Other People’s Money

The tenants without budgets typically needed to be in a very specific geographic area: between Rockefeller Center and Central Park, from Park Avenue to Avenue of the Americas. Cost was a secondary concern.

I can only speculate, but unlike typical industry competitors in a zero-sum game, the private equity firms and hedge funds often partner with one another on transactions and acquisitions mutually. Thus, there are synergies to being geographically close to competitors, even within the same building. As more firms locate at certain addresses, the “mystique” of the building grows and as a direct result, the rents rise into the stratosphere (or at least the triple-digits). Witness 375 Park Avenue (The Seagram Building) , 450 Park Avenue or 9 West 57th Street. The premium for entry into these properties is approximately 75% (or more) over the average Midtown Class “A” rental rate.

Need to Be “Green” in Downtown

Translated to Lower Manhattan or “Downtown”, a 75% markup over the average Class “A” rental would be approximately $85/rsf. If that is the criteria, 7 World Trade Center is just about there. The future requirements for premium rents in Lower Manhattan will need to be: a) new construction; b) potential for large, open trading floors; and c) LEED (Leadership in Energy and Environmental Design) certification representing sustainability, i.e. “green” buildings.

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May 22, 2007 by jack petrie.

Ron Roel, a former Newsday editor and a co-founder of the real estate educational service Real Estate Next, has written a white paper called “Real Estate and the Media: Understanding news coverage and its impact on the housing market.” While the paper examines the issue of whether the media unduly focuses on negative real estate stories in the residential real estate markets, it also raises the important question of how the media shape public opinion about the commercial real estate markets.

The Commercial Analogy

Roel describes the recent increases in stories about a housing “bubble” being ready to burst. The media equivalent in commercial real estate would be the increase in coverage of the unrelenting rise in the prices of commercial office space in Manhattan. Before opining on this coverage, let’s examine some of the underlying facts:

• Average prices in Midtown and Downtown are at all-time highs;
• Vacancy rates are at recent historical lows;
• Vacancy rates are below the consensus rates of “equilbrium”;
• The majority of real estate pricing is subject to supply and demand curves;
• Real estate pricing, like the economy itself, is cyclical and subject to both upturns and downturns;
• Commercial property owners are major advertisers in the local media;
• Real estate brokers are paid higher commissions commensurate with higher rents and longer lease terms;
• Most real estate brokers at any given time are representing the interests of a property owner.

What does this mean for the commercial tenant today?

1. If you face an upcoming lease expiration, think long-term. Consider renewing on a short-term basis until this market cools down. We often recommend a short-term renewal in order to allow time to execute a process that leverages the market. If you’re out of space and need to relocate, sign a short-term relocation lease.
2. The recent rise in prices has been fueled primarily by a lack of supply. For Downtown tenants, this will change as new construction breaks ground at World Trade Center. For tenants in Midtown, the peripheral boundaries have expanded in all directions. Tenants must now evaluate the west side, Midtown South and Northern Manhattan (Harlem).
3. Many companies are currently “inventorying” excess space. If and when the economy falters, this inventory will initially become “hidden” or “shadow” space and ultimately, sublease space. Currently, corporate “belts” are cinched at the loosest notch.
4. Don’t believe everything you read. Media coverage of the market is inherently biased. Examine the individuals quoted in the media. Understand which firms they work for. Ask yourself if those firms represent major property owners (and if in doubt, turn the page and look for their advertisements). Ask also if these professionals are incentivized to promote a market frenzy.
5. Commercial real estate is not like residential. Leasing office space is not like buying a home. There are no “hot” properties. There is only new construction and old construction. Companies do not select locations because of the property marketing, they select based on a matrix of criteria, including cost, commutation, amenities, efficiencies, etc. (i.e. Long Island City is still located in Queens).
6. Higher a trusted advisor. Understand how your advisor is compensated. Understand who your advisor’s other clients are and if any of those clients represents a potential conflict of interest.

In summary, navigating today’s commercial real estate market is fraught with greater peril than ever. The risk is in “locking in” a long-term rental rate that will leave you underwater in a market downturn. Take a deep breath, turn the page of that publication and let sounder reasoning take its course. There are many more options to discover from which to benefit.

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