To Predict Office Market's Future, Take In the View From the Cheap Seats

lab chart 041408 To Predict Office Market's Future, Take In the View From the Cheap SeatsIn the middle of 2000, vacancy rates in Manhattan’s cheapest office addresses started to increase. The increase was gradual at first, barely noticeable amid the boom times. Then, the pace of the increase quickened, and pretty soon vacancy rates for the cheapest offices were about double what they were barely two years before.

The reason, of course, was the dot-com bust, which sent tech firms scrambling from offices in areas like the Flatiron district and Soho. The national recession followed, and then Sept. 11 (the vacancy rates rose even higher after that); and pretty soon the entire office market—and the local economy—descended into a funk that it has spent the past five years gamely climbing out of.

Now, vacancy rates in Manhattan’s cheapest offices are increasing again. It’s subtle right now; but it could pick up substantially as the reverberations from the spectacular losses of companies like Bear Stearns—the companies that don’t rent the cheap space—take their toll on the sort that do.

“It’s hard to compare today with what happened in late 2000 and 2001 because it was the dot-com bust,” said Robert Sammons, the managing director for research at brokerage Colliers ABR. “In my opinion, I see the B market holding a little steadier, at least for now, because the financial services [firms] are being affected by all of this.” Mr. Sammons was referring to the economic downturn. “Other firms are going to be affected, but a little bit down the road as the layoffs increase here.”

Mr. Sammons authored a report for Colliers ABR released last week that shows a steady 12-month increase in vacancy rates for Class B and Class C office space in Manhattan. The last time the rates went up this consistently—aside from the bounce induced by Sept. 11—was in 2000 and early 2001.

In the spring of 2000, Manhattan’s Class B vacancy rate was 4.6 percent, according to brokerage Cushman & Wakefield. Barely a year later, by the end of September 2001, it had more than doubled, to 10.2 percent (largely because of the dot-com bust and not the terrorist attacks; those effects would be felt in the following months). The Class C rate during the same period rose from 6.1 percent to over 8 percent.

Here’s the situation eight years later: The Class B vacancy rate increased from 9.3 percent in March 2007 to 10.4 percent in March 2008. The Class C rate went up during the same period, from 5.4 percent to 9.1 percent. In Midtown South, the area with most of the borough’s cheaper office space, the Class B vacancy rate increased from 8.7 percent in March 2007 to 10.4 percent a year later; and the Class C vacancy rate nearly doubled annually, to 12 percent in March.

Things may not get as truly bad as they did in the office market—or in the larger local economy—in 2000 and 2001. But a corner has been turned economically, and it’s illustrated aptly by the reality of companies unwilling to lease or to hold onto even Manhattan’s least expensive offices.

Just give the downturn more time.

“It’s been somewhat really slow to hit Manhattan,” Mr. Sammons said. “It hasn’t been terribly dramatic yet.”