Plymouth Partners: 2001 Manhattan real estate a 'perfect storm'

Real Estate Weekly, Feb 6, 2002

Plymouth Partners, Ltd., one of New York's preeminent tenant representation firms, reported that the longest Manhattan commercial real estate boom in a generation had ground to a halt. After nine consecutive years of positive net absorption, all the gains made in the past five of those years were wiped out.

James Meiskin, president of Plymouth Partners, said, "For Manhattan real estate, 2001 was a perfect storm.'"

Contrary to conventional wisdom, most of the occupancy losses had already taken place before Sept. 11. Following the boom years of 1999-2000, during Which net absorption of office space totaled 15 million SF, the amount of leased space plunged 21 million SF by Sept. 10.

The remainder of the year brought additional occupancy reductions of 14.9 million SF. Total occupancy dropped by 9.2% during the year, from 391 million SF to 355 million SF, Manhattan's lowest level since 1996.

Availability rates skyrocketed during 2001. Manhattan's overall rate, which had dropped from 6.6% to 5.1% during 2000, more than doubled, to 10.9% by Sept. 10. By the end of the year, it had climbed to 11.6%.

The Downtown market was hardest hit by the events of 2001. During 2000, its availability rate dropped from 8% to historic low point of 4.6% Negative absorption of 4.9 million SF shot this rate up to 9.1% by Sept. 10. While 13.4 million SF was destroyed in the attack of Sept. 11, occupancy was further reduced by 2.7 million SF added to inventory afterward, bringing the year's total negative net absorption to 21 million SF. At year-end, 13.1 % of the remaining Downtown space was available for lease.

Midtown and Midtown South, likewise, suffered from high negative net absorption. Midtown's 5% availability rate more than doubled to 10.2% before Sept. 11, as tenants vacated 6.3 million SF. The relocation of displaced tenants after Sept. 11 then offset this downward trend, adding 1.1 million SF to occupancy by year-end. However, the availability rate then stood at 9.6%, reflecting 5.2 million SF of negative absorption for the year.

Midtown South began 2001 with only 5.5% of its space available, a historic low generated by a massive influx of Internet and dot-com companies during the 1990s. When that bubble burst, this market began to collapse. By Sept. 10, the availability rate had soared to 13.5%, reflecting 9.8 million SF of negative net absorption.

Corporate downsizing and the implosion of high-tech industries produced a massive increase in sublease availabilities during 2001. A year ago, only 3.2 million SF were available for sublease in Manhattan, 15% of total inventory. This figure soared to 15 million SF, 33% of inventory, by Sept. 10. Further downsizing toward the end of the year left 16.8 million SF on the sublease market, 35% of the 46.7 million SF available.

Meiskin said, "The reduction in demand during 2001 far exceeded the reduction of supply. As a result, landlords have been forced to accept rentals well below those they required a year ago. Because of the uncertainty that has gripped the market, most space is now listed without asking rentals. Those that are published are soft, and vulnerable to extensive negotiation."

He added, "New space can be leased at surprisingly affordable rents. Existing lease can be restructured to reflect the changed realities of the marketplace."