Street-side, midtown’s glass walls can feel desensitizing and claustrophobic. Inside are miles of cubicles, as far as the glazed eye can see. But it is not aesthetics that have made midtown the seat of America’s financial industry.
It is the mundane: access to New York City’s superlative labor pool; fast transport to mannered estates in Westchester and New Jersey; proximity to complementary businesses. And it is the intangible: the feeling of power that washes over an executive upon arrival to a desk many stories high, from which he may contemplate the green of Central Park and the blue of the East River, and the miniature people below.
It’s become increasingly apparent that midtown Manhattan’s status as the country club for office dwellers hangs in the recession’s balance.
“This is a financial services crisis, and as far as the United States is concerned, office-wise it is centered in midtown Manhattan,” said Robert Sammons, managing director of research at Colliers ABR. “This will probably change the dynamics of Manhattan, certainly of midtown, for years to come.”
Every spring, as the crocuses push through the soil, New York’s commercial real estate brokerages send forth a flurry of statistics about office leasing at the start of the year. This time, they were stark indeed. Midtown’s nicest buildings—known in the industry as “Class A” office space—had by April a vacancy rate of 12.2 percent, the highest since August 1996, when the vacancy rate hit 12.3 percent, according to Colliers ABR. Those buildings have 7.8 million square feet of sublease space available, the most since Colliers began keeping records in December 1991.
John Powers, CB Richard Ellis’ tristate chairman, recently told a group of reporters that 30 million square feet of midtown’s 222 million are available. About 10 million of those square feet are sublease space (see chart), 7 million of which are “unmarketable.”
Asking rents have fallen precipitously. According to Mr. Powers, in midtown in 2007, the average asking rent was $83.37 a square foot. In April 2009, it is $65.59. Those are asking rents, mind you. As Cushman & Wakefield New York Metro COO Joe Harbert recently pointed out, “If you really want to do a deal on Park Avenue, you could do a deal in the $50s.”
The wan financial industry, which on paper occupies 33.1 percent of Manhattan’s office space, signed only 17.3 percent of new leases in the first quarter of this year, according to Mr. Harbert.
TRUTH BE TOLD, it’s hard to sympathize with landlords who reaped such profits during the boom, when taking rents for the first time in American history routinely cleared $100 a foot. But, midtown’s health, home to New York’s sickly financial sector, is intrinsic to the city’s well-being and its very reputation as a maker of fortunes and a rewarder of enterprise.
At 8 on Tuesday morning, Ahmed Basuoney stocked soda cans in front of the Halal Food cart at the northeast corner of Park Avenue and 50th Street, between St. Bartholomew’s Church and the Waldorf Astoria. He’s lost about 45 percent of his business since the economy started melting.
Across Park Avenue, its medians blooming with tulips, Lutfur Rahman sold bagels and coffee. He has seen a comparable drop-off in business since late last year, just as he’s seen prices for commodities—bagels and doughnuts and coffee—rise.
He pointed to the tower that shares his corner, 320 Park Avenue, the Mutual of America building, and spoke about layoffs inside affecting his business. Four weathered American flags waved from its facade. “Before, we were earning $250 a day; now $160, $170,” he said. Something has to change.
In the third quarter of last year, the financial sector made up 34.7 percent of the city’s total wages, according to economist Sam Chandan, president and chief economist of Real Estate Economics. The U.S. runners-up are Boston (29.3 percent) and San Francisco (24.1 percent). It is far from clear what the financial sector will look like in two years, or, if it’s still a shadow of its former self, what will replace it as the leading high-end office leaser.
“You don’t have other participants in the market who are making up for the shortfall in demand,” Mr. Chandan said. Which, on the upside, means that it’s now a tad easier to gain access to this exclusive country club.
“I have several [non-financial and non-legal] clients who have been looking at doing deals in midtown and who thought they’d be priced out,” said Paul Myers, an executive vice president at CBRE.
Aside from more tenant diversity, what will midtown look like in the coming years, and feel like on a typical workday? Analysts like Mr. Sammons and Mr. Chandan say it’s just too soon to tell. For their part, brokers, back to their congenitally happy-go-lucky selves, are bullish.
“In the last quarter of 2008, we were all waiting for the shoes to drop: Lehman and Bear Stearns, Merrill Lynch, ad infinitum,” said Bob Tunis of First Service Williams. “When nothing happened in the last quarter of 2008, we said, ‘Oh, in 2009, it will be a bloodbath.’ And guess what, we’re already in the second quarter of 2009, and that extra free fall of millions of square feet didn’t happen and may not.”
He has a point. So, too, does Studley’s chairman and CEO, Mitch Steir, who, though he acknowledged midtown vacancies will increase and rents will drop for a while longer, was also optimistic: “Never underestimate the resilience, the ingenuity and the entrepreneurship that exists in this country and in this city.”