Lisa Chow is the economics reporter at WNYC. She tries to explore in her stories surprising aspects of New York’s many economies—in plain view or hidden, in neighborhoods or sectors.
Commercial Rents Nosedive, Ripple Throughout NYC
Thursday, April 09, 2009
New York, NY —
We’ve had a slew of reports this month, showing that commercial rents in Manhattan are falling fast - faster than they have since record keeping began in the 1980s. As financial firms, some of the city's largest employers, cut jobs, they're giving up the offices that go with those jobs, which means there's a lot more available commercial space on the market. This has had a ripple effect throughout the city. WNYC's Lisa Chow reports.
REPORTER: We're standing in the lobby of one of the most famous buildings in the world. The Empire State Building, built during the Depression to more than a quarter mile above the ground. And now it's undergoing a giant facelift. Fred Posniak oversees leasing for the building, on behalf of the Malkin family and the Helmsley estate.
POSNIAK: As you can see from the scaffolding that is up, the building is actually going through a $500 million capital upgrade to the property.
REPORTER: You see, it's a building that looks great from the outside. But the inside is drab and outdated, and has not been prime office space. So the owners are trying, finally, to capitalize on the building's cool icon status. And in an effort to attract larger and more prominent companies, they've moved out smaller tenants to assemble full floors. That, and dealing with an apprehensive business climate, has left the Empire State Building 25 percent vacant.
POSNIAK: You never like vacancies. You want to rent them as quickly as you can. But we can afford to do what we can afford to do. We still make money even with a 20 percent vacancy.
REPORTER: That's probably not the case for most landlords in the city, particularly those who bought at the peak. But the Empire State Building is experiencing a problem that commercial landlords are facing across the city. Rents are falling. Brokerage firm, CB Richard Ellis, reported yesterday that effective rents have already fallen 30 percent from their peak, if you include all the free months of rent and the work the landlords are now throwing into deals. And vacancies are rising. The firm reported 13 percent of total commercial space will become vacant over the next year, up 4.5 percentage points from a year ago. Posniak takes me through the empty 61st floor.
POSNIAK: And basically as we walk, it shows you how the floor flows. The views here are spectacular. You have views in every direction.
REPORTER: In his sales pitch, Posniak claims it's the highest available floor in Manhattan right now.
POSNIAK: This space will probably rent in the mid 50s per square foot, and for that we will turn key. We’ll spend about $50 a foot in TI, tenant installation, and for this floor, we’ll probably give six months of free rent, on this full floor.
FISHEL: Grain of salt. What the landlord is saying when he’s speaking to you, or speaking to me, when we’re first talking is just a starting point.
Ken Fishel is a broker who represents mostly tenants, small businesses and nonprofits, renting space in the midtown and downtown markets.
FISHEL: The main thing I’m listening for is attitude and how much outreach I’m hearing.
REPORTER: Do you like that starting point though?
FISHEL: It doesn’t scare me. It’s not a starting point that scares me away, but that's a starting point.
REPORTER: These days, tenant brokers like Fishel have a lot of power in the market, a big shift from six months ago, when landlords and their brokers had the upper hand.
FISHEL: I just did a deal in midtown for $52 a square foot. Now the funny thing about this deal was the tenant making this deal really loved this very same space about eight months ago, but their financing wasn’t ready and so they couldn’t take the deal but at that time, that deal that we were going to make was $80 a square foot.
REPORTER: In other words, the rent dropped 35 percent in eight months.
FISHEL: And this particular landlord is the kind of landlord that we were looking for. The kind of landlord that sees the market, sees his vacant space, sees a tenant they want to make a deal with and are not crying about the market. They’re ready to make the new deal, whatever it is today, and make it.
REPORTER: Fishel says the shock to the market for office space hasn't been good for all tenants. In some cases it's stranded those businesses who signed leases during the boom, and now they're paying above market rents as their revenues are shrinking. So, looking for commercial space? Fishel's advice: take advantage of a buyer's market, and lock in to a long term lease, before the market turns around. For WNYC, I'm Lisa Chow.
For more on why commercial rents are falling, listen to Lisa Chow with Richard Hake: