Oh No They Didn’t! Brokers Utter the U-Word as Rents Peak

breaks 399parkave 5v Oh No They Didn’t! Brokers Utter the U Word as Rents PeakFor the first time in a while at a Cushman & Wakefield breakfast market meeting, the eggs and raspberries of power eatery Michael’s didn’t sit so well.

There was cautious—emphasize cautious—optimism from the Cushman team forecasting the Manhattan real estate market. Yes, rents are up, and yes, rents have reached record levels, but: “Rent growth is slowing,” said Joseph Harbert, the city chief for Cushman.

“Other than really high-end space where it seems like the sky is the limit, price increases couldn’t continue at the pace we were at,” said Mr. Harbert. “Yes, we will see leveling off of the rate of price increases.”

In the summer, brokers were toasting financial services—banks, law firms, hedge funds, the companies that drive the market—for driving up rents at a dramatic pace (through June, financial services accounted for 75 percent of the leases signed at more than $135 per square foot).

But now it looks like those financial firms are questioning whether they should bother with leases when more immediate problems loom ahead.

“Clearly there’s going to be some uncertainty about what happens with financial services over the next three months as the full effect of this credit crunch starts to hit these companies,” said Ken McCarthy, the head of research at Cushman. “It is quite possible that we will see a slowdown.”

As those financial firms begin to reassess their employees, they’re definitely reevaluating their second-biggest expenditure: real estate.

“Some deals have died,” said John Cefaly, a broker at Cushman. “Bear Stearns pulled back on a deal at 237 Park and Lehman Brothers pulled back on a deal at 399 Park. Financial services drive this city, everybody knows that. When that part of the market dries up, there is some uncertainty.”

Yes, uncertainty: The buzz word of 2007 real estate.

With all of that uncertainty in the air, Mr. Harbert and Mr. McCarthy repeated that they were “pleasantly surprised” that leasing activity remained at a brisk pace in September.

But there are signs that things have slowed down already. For one, the driving force of the market, the mega leasing deal, is beginning to vanish. Of deals larger than 100,000 square feet, there were 42 last year—including 28 by this point—whereas there have been only 18 in Manhattan so far this year.

“The larger deals we come to rely on haven’t come yet this year,” said Mr. Harbert.

In downtown the big deal is totally gone and leasing activity downtown has fallen. This year there has been 3.4 million square feet leased downtown, whereas last year at this time there was 4 million square feet leased (with rents on a ridiculous uptick, are companies finally saying to hell with it?).

Leasing activity was down overall, too, in the third quarter—year to date activity sits at 18.3 million square feet, down 2.5 million square feet from this time last year—but Mr. Harbert chalked that up to high rents and fewer available spaces.

Then there’s the investment sales market, which has slowed down as well. In the third quarter, a relatively skinny $8 billion worth of buildings were sold or went to contract, compared to $34.1 billion in the first half of the year. Bids for buildings on the market have fallen, and financing for sales is becoming awfully elaborate, according to Cushman financiers.

But, of course, there are still positive signs. Average rents rose to $81 per square foot for Class A midtown space; and even if Lehman Brothers and Bear Stearns are backing down from deals on Park Avenue, rents there have never been higher. Rents for Class A space on Park Avenue are at $110 per square foot, and rents for Class A space on Madison Avenue are at $101 per square foot. Though pricing is slowing down this year, it’s up 40 percent from last year.

“We’ve never seen rises like this in such a short period of time,” said Mr. Harbert.

The question now is whether anyone will still pay it.