Recovery the most powerful in thirty years

Real Estate Weekly, June 25, 1997 by Stephen B. Siegel

Since the start of 1996, 5.3 million square feet of excess space has been absorbed in Midtown and the availability rate has dropped 2.7 percentage points to 11.5 percent. The Downtown availability rate has declined by 3.9 percentage points during the same period, on the strength of 2.7 million square feet in positive absorption - although it still hovers above 20 percent.

The exemplary performance is being driven by an economic environment that, on a macro basis, is as close to nirvana as we can get: continued expansion of the total economy and steadily failing unemployment - neither of which has touched off renewed inflation.

Locally, the prolonged bull market on Wall Street has encouraged expansion by the financial services industry - long the bellwether of the Manhattan economy. The most recent example of this is Standard & Poors Corporation, which recently signed a letter of intent for more than 900,000 square feet at 55 Water Street. (The S&P deal has not been finalized yet and therefore, it has not been included in any of the market statistics cited here.)

This traditional piston in the local economic engine has been joined by Manhattan's emergence as a touchstone of the new entertainment economy. Companies like Disney and Conde Nast have inspired a rejuvenation of Times Square - a phenomenon that has now tipped the center of gravity in the Midtown office market from the East Side to the West Side. Meanwhile, Manhattan continues to reap a bounty from the increasingly cosmopolitan nature of the local economy. This was recently borne out by Christie's recent commitment to establish a world-class auction facility in the heart of Rockefeller Center.

As a result, leasing velocity is poised to reach levels not charted before during the 1990s. Through May, Midtown leasing had eclipsed last year's total by 31 percent and already reached 7.1 million square feet. In the previous seven years, the most space leased in any one year is 16.2 million square feet in 1994.

The Downtown market totals are even more impressive when you consider that as recently as 18 months ago, this market had been written off for dead. Both March and April produced the highest level of Downtown leasing in four years, and year-to-date, total activity has swelled to 3 million square feet. The Downtown market has never produced more that 5.6 million square feet in any one year since the turn of the decade.

Demand for Manhattan office space is far from exhausted. Recently, Crain's New York Business published a list of tenants with requirements of 200,000 square feet or greater that are currently active in the market. This list - far from complete - had 27 companies with an aggregate requirement of at least 12.4 million square feet. Among smaller users, demand is equally robust.

In this environment, additional office construction seems highly likely, particularly in view of The Durst's experience at 4 Times Square. I would expect ground to be broken at one or more of three potential sites - 383 Madison Avenue, Rock West (behind the Exxon Building) or one of the other Times Square redevelopment parcels - by the end of the year.

As the market tightens further and a new construction cycle begins, I think it is important to take account of lessons that have been learned from the past.

First, despite the recover, the market has not yet even reached equilibrium between supply and demand, let alone entered a landlord's market. Except for the largest users, most tenants will have a plethora of location choices within Manhattan - not to mention the suburban markets.

The market remains highly fluid and subject to constant ebbs and flows. With few exceptions, every commitment made by a major space user will result in their former space being returned to the market. For tenants that are trading up to better facilities, this could result in harder-to-lease space coming back on the market. Rents have regained some of the ground lost earlier in the decade but remain well below their late 1980's peak. They have further to climb before broad-scale new development - unsubsidized - becomes truly viable.