The Economics of Office Leasing in 2010

Amid the Bureau of Labor Statistics’ most recent reports of narrowing economywide job losses, the nation’s leading employment centers are exhibiting a wide range of labor-market trends. At one extreme, employment in Detroit has fallen by 7.2 percent in the past year. Since the beginning of the recession in January 2008, more than one in every 10 jobs has been wiped out in the Motor City. In the District of Columbia, on the other hand, payrolls have actually grown over the same period, fueled by an increase in government programs and a corresponding uplift along K Street.

As for the host of metropolitan areas that fall between these two poles, the timing and extent of the resumption in job growth will dominate economic and property-fundamentals trends over the next year. This point was reemphasized last Thursday when Bruce Katz of the Brookings Institution testified before the Senate Committee on Banking: “The American economy, like most developed economies, is a network of metropolitan economies. … The Great Recession has affected different metro economies in radically different ways. … Even as economists talk about national recovery, a large number of our metropolitan economies are still mired in recession.”

As challenging as the past year has been for New York City, the Big Apple is not among the laggard markets to which Mr. Katz referred. At the center of the crisis in the global financial system, New York has undoubtedly seen its labor market come under unique strains since the recession took hold here. Subsequent to the economic shocks of September 2008, the city shed more than 60,000 jobs in the final three months of the year. A disproportionate share of those jobs was in financial services and related occupations, where relatively high wages otherwise feed multiplier effects across the local economy. Stepping away from the textbooks to read conditions from the sidewalks, it is clear that losing our best-paying jobs has been devitalizing.

Coincident with the labor-market contraction and the watershed events that precipitated the job cuts, business confidence also plummeted. As businesses were loath to make any long-term commitments while under a shroud of economic uncertainty, their capital investment and leasing activity came to a standstill in late 2008. The evaporation of demand for space and the sudden rise in sublet availability sparked one of the most abrupt declines in rental rates ever observed in Manhattan’s office submarkets.

 

WHAT A DIFFERENCE a year makes.

At the close of 2009, it is apparent that the direst predictions for the city’s economy and the financial services sector have not been realized. By the New York Fed’s own estimation, “the pace of decline eased considerably in spring 2009 and leveled off in July.” In fact, many of the financial services firms that are the backbone of New York City’s agglomeration have stepped away from the precipice and into surprising profitability. So much so that they are now imperiled in the court of public opinion.  

The Economics of Office Leasing in 2010