Has the Fizz Left the Bottle? Worrying Signs for Manhattan Real Estate

New Yorkers following along at home can be forgiven for thinking that the good times will roll ever onward in Manhattan’s office and housing markets. Midyear statistics display so many signs of strength in each that it doesn’t appear either can go anywhere but up—or, at the least, certainly not down.

But the housing boom ended a while ago, and the office market’s getting there, a victim of its own success.

The office vacancy rate for Manhattan dropped in the second quarter of this year to its lowest since early 2001, according to brokerage Cushman & Wakefield, hitting 5.3 percent; that’s nearly half what it was two years ago. This growing demand for dwindling amounts of space increased office rents 36 percent over last summer, to an average price per square foot of nearly $60.

This leasing and these rents could soon become a thing of the happy past. History dictates that the office market that’s been going steadily upward and onward since 2002 will plateau fairly soon—and then head downward.

The office market, more so than the housing market, is tethered tightly to the local economy. Cushman & Wakefield, with Moody’s Economy.com, did a chart showing the occupancy rate for Manhattan offices and the number of office-based jobs in New York City from the late 1980’s through March 2007. Not surprisingly, as the number of jobs increases, the occupancy rate increases, both cresting and falling almost in tandem.

The peaks for both were in early 2001. Then, the double wallop of the dot-com slide and September 11 sent both into a decline until early 2003.

“If there’s a downturn in the economy, particularly in job creation, then obviously people will be looking less for office space and space will open up through subleasing,” said Barry Hersh, associate director of the Newman Real Estate Institute at Baruch College. “Another thing is that New York City has become more dependent on the financial services industry. So, if the stock market corrects, as they say, there’s a risk.”

Also, the office market is nearing what could be a historic peak. The vacancy rate dropped below 4 percent in 2000, and it could do the same by the end of this year—leasing has been brisk, even with the higher rents; corporate profits are strong, after all; but, if history’s any guide (and it is), then the rate will inch back upward. Or, office rents could rise so high—landlords of choicer class A towers are already charging more than $150 a foot—companies may move back-office operations outside of Manhattan (hello, Jersey City!).

While the office market creeps toward this peak, the housing market’s has already come and gone. From 2004 to the middle of 2006, Manhattan followed the rest of the country—the inventory of unsold homes kept increasing, and so did prices. Sales during the same time stayed steady, neither increasing too much nor slipping deeply, as the price spikes snagged headlines.

“What changed in the middle of last year is that the level of sales activity escalated,” said Jonathan Miller, president and CEO of appraisal firm Miller Samuel. “And that had the effect of eating into or eroding abnormally high inventory here.”

The number of home sales spiked 103.7 percent from the second quarter of 2006 to the second quarter of 2007, and 13.4 percent from the first quarter, according to Mr. Miller’s firm. That’s the sort of sales bump expected in a busy spring season, but the generally light sales activity in the two years before mid-2006, coupled with the rapidly rising prices during the same time, reveals a housing market that had already taken its turn in the spotlight by the start of this year.

Still, two of the priciest home deals in Manhattan history happened this summer, suggesting the market yet has the power to surprise. A condo in the Plaza Hotel sold for $51.5 million, and Edgar Bronfman Jr. went to contract on his East 64th Street town house for at least $50 million.

But the boom is behind the housing market, according to Mr. Miller and others, even if prices, especially at the luxury end, cause the occasional stir. The office market should enter its own protracted twilight soon—though, like the housing market, it’ll have its day again. This is New York, after all.

“I always find New York to be very dramatic,” Mr. Hersh of Baruch College said. “Smaller towns, things sort of happen in slow motion. In New York, when the money dries up—whoosh! That’s it.”

Has the Fizz Left the Bottle? Worrying Signs for Manhattan Real Estate