Ken McCarthy stood before an oversize floral arrangement in the glass-enclosed back room of Michael’s on Tuesday and said he feared becoming the next Doctor Doom. The head of New York research for Cushman & Wakefield was referring to legendary Salomon Brothers economist Henry Kaufman, who earned that moniker in the 1970s and 1980s by issuing one bearish prediction after another.
The overpacked room of brokers and reporters (including seven on a field trip from The New York Times) laughed appreciatively. And then Mr. McCarthy commenced his bearish predictions about Manhattan’s office market. The increasingly alarming data is, he said, beginning to catch up with reality.
“Since the beginning of the year, [New York has] lost about 26,000 jobs, but we expect that to get much worse,” he said of the New York market. He called Comptroller William Thompson’s predictions of more than 165,000 job losses through 2010 a “reasonable estimate.”
Even worse, because “New York City is a service provider for the rest of the country,” its recovery will lag behind that of the rest of the nation.
That, he said, will likely happen sometime in 2010. Joseph Harbert, Cushman’s COO for the New York region, picked up the theme.
He said leasing in Manhattan dropped from 23.5 million square feet in 2007 to 19.1 million square feet in 2008, “the second-lowest year since 1997.” The overall vacancy rate in Manhattan jumped from 5.7 percent at the end of ’07 to 8 percent at the end of ’08. Midtown Manhattan, home to many of the collapsed financial firms, saw the most dramatic vacancy rate spike, rising 2.3 percentage points to 8.5 percent, the highest in Manhattan. And the Class A vacancy rate in midtown hit 9.2 percent, which is officially tenant-market territory. In the midtown Manhattan subsector, leasing activity dropped 17.2 percent from last year, and Park Avenue activity fell off 50.7 percent.
“Put all that together and what do you have? You have prices going down,” Mr. Harbert said.
In the third quarter of 2008, midtown asking rents averaged $84.48 a square foot. In the fourth quarter, they averaged $79.81.
“I’ve been doing this for 25 years,” Mr. Harbert said. “We don’t recall seeing drops like this in recent history. A $5 drop in three months is a big drop.”
Midtown South’s submarket was just a tad tighter, with leasing off 21.5 percent and the vacancy rate at a relatively low 7.1 percent. And downtown, leasing activity was down 23.4 percent and the vacancy rate was at 7.4 percent.
And let’s not even talk about investment sales! Really.
“We’re still in the midst of a bit of a freeze,” Mr. Harbert said, adding that the lack of data points (actual transactions) means that estimates of a potential 20 to 30 percent drop in asset prices are hard to substantiate.
Most of last year’s $19.2 billion in Manhattan investment sales worth more than $10 million took place in the first half of 2008, and the year closed with 60 percent less activity than in ’07.
And, finally, retail. “Compared to office leasing and in comparison to investment sales, retail has held up well,” Mr. Harbert said, “but we think we are at the beginning of a depreciation.”