Last year’s economic spasms crippled not only New York City office landlords, but also the three major industries that pay those landlords top rent: finance, media and law. That trifecta has in recent months hemorrhaged sublease space back onto the market, as a CB Richard Ellis white paper released to The Observer shows, dragging down rents and prompting the question, who will take that trifecta’s place?
Sublease space—extra space that tenants like Lehman Brothers and The New York Sun put back on the market—isn’t just a subset of the larger office market. It impacts that overall market, and not in a pretty way.
“As you get a very high level of sublease space, it really begins to put downward pressure on the entire marketplace, because of what it does to pricing,” said Howard Fiddle, vice chairman for the tristate region at CB Richard Ellis.
That’s because distressed tenants bound by long-term leases are more desperate than landlords to get some rent, any rent, rather than shoulder the burden alone. The average Manhattan sublease asking rent, at $62.71 a square foot, is 11 percent less than the average direct asking rent of $70.23, according to CBRE. (And those are asking rents, mind you, which, thanks to the surge in supply, have become increasingly elastic.)
“At times, in real bad economies, sometimes [sublease space] can convert to direct space if a tenant goes out of business,” Mr. Fiddle added. “A lot of these hedge funds, not to name any names right now, are listed for sublease, but they’re teetering and in a few months could be gone.”
And so the sublease pile grows. And grows.
Between July and December of 2008, Manhattan’s sublease availability—sublease space that is either vacant or will be within 12 months—jumped from 7.2 million square feet to 11.2 million, or 28.3 percent of available office space in Manhattan’s 362 million-square-foot marketplace.
Most of that space, unfortunately, is coming from the three pillars of New York’s tenant base. Financial firms, which occupy 25 percent of the supply, coughed up 3.9 million square feet (40 percent of available sublease space). JPMorgan Chase’s acquisition of Bear Stearns alone added 600,000 square feet, and AIG’s troubles, Barclay’s acquisition of Lehman assets and the Bank of America/Merrill Lynch merger could add up to 4 million additional square feet. The advertising/media industry contributed 1.8 million square feet (19 percent); and law firms added 1.3 million square feet (10 percent).
MEANWHILE, CBRE reports that “the number of blocks of contiguous sublease space greater than 100,000 square feet in Manhattan has almost doubled since December of 2007, and the total square footage has increased by 109 percent.” That’s a trend, according to the brokerage, “that will likely increase as corporations continue to reduce their work force [by an estimated 86,000 office jobs through 2009].”
In December 2007, there were nine such blocks, totaling 1.5 million square feet. By December 2008, there were 16. (In 2002, after the dot-com bust, there were 26 blocks of 100,000-plus contiguous feet.)
Thank God 2008 is over. But what of the economy in ’09? And in ’10? Dare we hope?
“In 2010, growth will be lackluster at best,” said Sam Chandan, formerly of REIS and now president and chief economist at consultancy Real Estate Economics, adding that the national economy’s contraction should slow at the end of this year. New York’s economic recovery will lag the rest of the nation’s, he said, thanks to its unique exposure to the finance industry.