Cushman’s Bruce Mosler on the Downturn and Downtown

Location: Give us a sense of where the office-leasing market’s going in terms of taking rents, negotiability and space.Mr. Mosler:

Location: Give us a sense of where the office-leasing market’s going in terms of taking rents, negotiability and space.
Mr. Mosler: The first observation that I have is that I think that what we’re now seeing is much more serious activity and interest in space than we’ve had perhaps in the last six months. I think it’s due to a couple of important dynamics, the first being, nine months ago, we were still dealing with panic still in the system: Was the financial system going to survive? Was the financial system going to recover? And I think a lot of those questions have been answered. … Our banking system is going to be O.K. and that’s important.
The second phase is that CEOs making decisions today feel more comfortable making decisions because we’ve seen 30 percent more value come off the table. So there’s been substantial deterioration in rents, and I think people have begun to look at that deterioration; and even if there’s another 5 or so percent to go, as some of the more forward-looking economists have said, people believe this is an opportunity to take, from a tenant perspective, advantage of the marketplace that is going to inure to their benefit.

For now, Cushman’s own stats and those of other firms show some of the highest vacancy rates coming. There was a report out recently saying something like one-fifth of Class A space in downtown would be vacant by 2012, and that will only get worse because of the trade center going up. When do you see a true turnaround? You talk about activity picking up, but a lot of people write off 2009.

Look, let’s define what turnaround means. First and foremost, I’ll bring everything back to the macro-economy; and in the macro-economy, I think what we’re seeing is stability. And that’s a very important contributor to the next couple of comments that I’m going to make.
I think that what we will see during the latter part of this year are commitments made not just to renew but to relocate. That’s, I think, a profound statement about people’s confidence, long-term, in business—the willingness to commit to 10- and 15-year leases says that they have confidence in their business and they want to take advantage of depressed rental rates. … So there’s a segment of the marketplace, I think, in the later half of this year [that] will move based on increasing confidence in the system. Activity is going to convert, albeit at lesser levels than we’ve seen in the frothy years. I think that rates are going to continue to be depressed until Q2, Q3—where I think we’ll reach the bottom—of next year; and I think rental rates will begin to rise again in the latter half of Q2, Q3, moving through the balance of the year. …
Let’s keep this in perspective. Even at the height of this downturn, vacancies in midtown have reached the teens—we’ve seen that before, in the early ’80s and ’90s. The difference is a very large part of this marketplace’s vacancy is made up of 30 or 40 percent of shadow space. That space is going to move relatively quickly, I believe, because it will be marked to market. …
And coming back to your question about vacancies … we have seen high vacancies before. So we’re not at record vacancies; and we’ve seen these rents before. What is different about this downturn is the speed with which we got there. We got there almost twice as quickly as we did in the past. It took several years—this was over the span of 12 to 18 months. But I think everybody feels we’ve begun to bottom.

And downtown?
As for downtown, the total availability rate for downtown is about 16 or 17 percent. Now, again, historically, we’ve seen higher vacancies downtown—in the late ’80s, early ’90s, we saw high vacancies. And then what we began to see downtown was a complete renaissance—a conversion of commercial to residential; an influx of retail, luxury brand and other; infrastructure investment in downtown. So, I’m a big believer in downtown. And I think that the challenge for this marketplace, the good news overall, is that without significant overbuilding, which we won’t see … First of all, there has been a discipline in building which has been in place over the last 15 years; after the last, if you will, rush to build without a tenant in hand, speculative development stopped. … It simply stopped, and a lending discipline went in place that has prevented us from the same kind of overbuilding and has, I think, kept this market, on a relative basis, pretty healthy. …

Cushman is involved in leasing One World Trade, correct?

We have been named as the leasing agent for Freedom Tower. We still have to formally execute that.

Cushman’s Bruce Mosler on the Downturn and Downtown