Report: demand for NYC office investment still strong

Real Estate Weekly, June 18, 2003

Marcus & Millichap Real Estate Investment Brokerage Company recently released its Office Research Report for the New York City market, which indicates that demand for office investments remains strong due to the city's recognition around the world; however, softer market conditions will persist for the remainder of the year.

"The Manhattan office market will be challenged by rising vacancies and falling rents in 2003, but the bottom is near," comments Mitchell R. LaBar, senior vice president and regional manager who oversees the firm's New York, New Jersey and Connecticut offices.

Following are some of the most significant aspects of the report

* The final employment numbers for 2002 show substantial job cuts, with New York City losing 5% of its F.I.R.E. sector payroll; however, job losses will slow this year. New York City experienced significant job losses in both 2001 and 2002. Economists are forecasting employment growth for this year, with New York City gaining 20,000 jobs, mostly in the services sector.

* Office construction dipped in 2002, with 2.5 million SF delivered. A few projects will be completed in 2003, but some developers are holding back on new construction until tenants can be signed. By year end, 2.9 million SF are expected to come online.

* Vacancies rose from 8.3% in 2001 to 9.7% in 2002, with further increases expected in 2003. Vacancies will tick up in 2003, rising from 10% in first quarter 2003 to 10.5% by the end of the year. Downtown offices were 13% vacant in first quarter 2003, and the submarket appears to be improving, due to limited construction.

* Rents continued to decline in early 2003, dropping to $39.15 per SF in the first quarter from $42.16 per SF a year earlier. Rents, which have been declining throughout New York City since 2000, are expected to reach bottom in 2003, with economic recovery on the horizon. The Grand Central submarket is poised for a rapid return to increasing rents, while Downtown is expected to take somewhat longer to recover.

* Investment activity will remain stable in 2003. Despite slipping market fundamentals, investors will continue to recognize Manhattan as the premier office location in the world. Notwithstanding current market woes, office values will rise in 2003. Investment sales volume was strong in 2002, with $6.5 billion in office buildings sold in Manhattan.