If commercial real estate executives were to write a book about 2009, the title of choice would likely be A Tale of Two Markets.
Instead of the best and worst of times, the real estate market of 2009 featured a disastrous first half and a closing half that was not nearly so awful.
At the outset of the year the market struggled following the financial meltdown that began in the fall. Struggling financial firms dumped millions of square feet of sublease space on the market, dragging down rents. Meanwhile, potential tenants were paralyzed by fears of an economic Armageddon in the wake of Lehman Brothers' September bankruptcy.
“In the first half of the year there was virtually no activity,” said Howard Nottingham, an executive managing director at Studley. He also noted that in his 26 years as a broker, “I've never seen such uncertainty.”
Leasing activity plunged 40% to 3.1 million square feet in the first quarter from the year-ago period, according to Cushman & Wakefield Inc. It was the least active first quarter the firm recorded since it started keeping records 25 years ago. Sublease space more than doubled during the quarter to 10.3 million from a year earlier, coming close to its five-year high. That pressured rents, which plummeted 11% to $65 a square foot from their peak in the third quarter of 2008. And the vacancy rate climbed to 9.6% from 6.1% a year earlier.
By the second quarter, rents had fallen to $60.23 a square foot, and vacancy had bumped up to 10.5%. The amount of total available space reached 41.2 million square feet, the highest in nearly five years.
However, in the second half of the year, the situation began to improve as companies started to believe the economy wouldn't fall apart. Tenants began signing deals, either because their leases were expiring or they wanted to take advantage of bargains. Leasing activity leapt 61% to 4.9 million square feet in the third quarter from the first quarter.
“Leasing velocity went from being a boxer who was on the mat to one who was back on his feet,” said Matt Van Buren, an executive managing director at CB Richard Ellis Inc. “There is confidence out there again.”
Asking rents are down 22% from the peak in the third quarter of 2008, but brokers say that when factoring in concessions such as building allowance, net effective rents are down between 50% and 60%. Still, they note the pace of the decline has slowed. According to Jones Lang LaSalle, rents fell 14% from the fall of 2008 to the spring of 2009. But the decline narrowed to 11% from the spring of 2009 to this past autumn.
The increased activity is certainly good news for brokers who work on commission. However, the spurt of activity hasn't resulted in a decrease in available space. In fact, in the first nine months of this year, 15 million square feet of space was put back on the market. Last year, 4 million square feet of space was returned to the market.
The combination of falling rents and stifled tenant demand is cutting into buildings' cash flows, posing major problems for owners struggling to pay off big loans. This year, SL Green Realty Group, a lender at 100 Church St., pushed the building into bankruptcy when its owner, the Sapir Organization, failed to make debt payments. It is set to take control of the building early next year.
Similarly, Harry Macklowe was forced to relinquish 1330 Sixth Ave. to one of his lenders this year when he didn't repay a loan. And Joseph Moinian and a fund led by Westbrook Partners gave back the keys to 475 Fifth Ave. after they failed to make loan payments.
Source: Theresa Agovino (2009). Glass ends year half full in office market. Crain’s Published Dec 21, 2009 Viewed Dec 22, 2009, http://www.crainsnewyork.com/article/20091221/FREE/912219994
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