Review & Forecast roundtable

Real Estate Weekly, Jan 30, 2002

Real Estate Weekly: Last year was almost two years, before Sept. 11 and after Sept. 11. I guess we could start by talking about what was happening in the market prior to Sept. 11 and then talk about the impact of the attacks and what was happening in the market after Sept. 11.

Steven Swerdlow: From Jan. 1 to Sept. 10 we had seen a gradual erosion of the market from what was an historically tight situation. We hadn't seen vacancy rates as low as they were at the end of 2000 for 20 years. It was December 1980 when we had the last historically low vacancy rates. Vacancy rates had gotten as low as 2%, which is below functional vacancy. There had been a commission formed by Sen. Charles Schumer to figure out how to respond to the space shortage. Then, with the collapse of the dot-coms, we started to see erosion gradually through the year. Then Sept. 11 came along and there really was a decline in the market. Vacancy rates have now gone - over that 12-month span - from roughly 2% to up over 8%. Significant amount of sublet space has been moving onto the market; at least half of that increase is attributable to sublet space. We expected (and we were wrong) right after Sept. 11 that the space being taken out of service, roughly 30 million SF, that there would be a tightening in the market . It was counterintuitive because the market softened further. A lot of people had been sitting on vacant space and, after Sept. 11, they brought it to market.

Mark Jaccom: Just to follow up with what Steve is saying, I think companies were in the process of lying off a tremendous amount of employees. I don't want to say that Sept. 11 kickstarted it or gave them a reason to do it, but after Sept. 11, we saw a tremendous amount of space come on the market. At this point, the Downtown tenants that went through Sept. 11 are not looking to stay down there, but are looking for space in midtown. The problem they are finding is that the space in Midtown is still leasing at a high rate. They're coming off deals of $35-$45 and looking at space in midtown of $70-$80 a SF. It is a religious experience for them that they would want to move, but economically they can't. The city and state, at this point, have not given a clear picture of what will keep these tenants Downtown - what incentive packages they are going to need to seduce them to stay in that marketplace. A lot of us are saying 'stay tuned,' a lot of us have clients that are kicking the tires in midtown. Psychologica lly the tenants want to leave, but they cannot break these leases because of these prior commitments.

Carl Weisbrod: I agree with what has been said. There was a disconnect in the market prior to Sept. 11 and even after Sept. 11, to an extent. I don't think we've seen the number of layoffs that is commensurate with the loss of space. In fact, many companies had an excess of space prior to Sept. 11 and prior to layoffs. Everyone was surprised to see how much vacant space was in 7 World Trade Center. So, not all of the give back of space and the increase in the vacancy rate is due to layoffs either prior to Sept. 11 or post Sept. 11, but rather to a lot of companies having excess space that they have not yet formally put on the market. Second, I agree that a lot of companies are waiting to see what will happen on the state/city with incentives. I think that will develop over the next few weeks, probably by the time this article gets published. I think it will have a major effect in stabilizing the current Downtown market because many companies that may be willing to come Downtown now because of cheaper rents a nd might be willing to stay if the price is right. Given the sticker shock they are already experiencing with Midtown space, they will do so once the incentives become clear and particularly if they are 'as of right' which I expect most of them will be.

Stephen Estroff: As an attorney, I see the transaction when it is a transaction. I would describe the market before Sept. 11 as slow. In the leasing market there was an awful lot of sublets and surrenders. There, were a lot of people cutting back especially from the dot-com period. After Sept. 11, there was an immediate flurry of activity with emergency space, deals that were done within 30 days and now it is absolutely horizontal. My clients are telling me that there is a mismatch between expectations. They are not consummating deals, it's sticker shock as you described. The bottom line is that I am experiencing a horizontal leasing market, very little activity.

Richard Anderson: Members of the Building Congress are predominately in the design and construction sides of the industry and they are mostly ahead of the curve. They were in a very robust situation before Sept. 11 with overload, extensive backlogs and a lot of activity. Since Sept. 11 there have been slowdowns, but they have only been in certain sectors such as interiors. People that are doing public work have yet to have any kind of a pullback that could happen with the budget pressures within the upcoming year. The institutional work, such as some of the universities, medical facilities, have been very, very strong. The outlook, while it is guarded for the upcoming year, is still very active for most architects, engineers and contractors.