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Thread: State of the Commercial Market

  1. #1

    Default State of the Commercial Market

  2. #2

    Default State of the Commercial Market

    Thanks, for posting this Christian.

  3. #3

    Default State of the Commercial Market

    According to figures compiled by Insignia/ESG, the real estate brokerage and services company, the overall vacancy rate in Manhattan stood at 11.8 percent at the end of the third quarter of 2002, compared with 8.4 percent a year earlier and just 3.8 percent at the height of the market in 2000.

    The overall asking rental rate in the same time had fallen to $44.66 a square foot annually, from $50.75 a square foot a year earlier and $52.67 in 2000.

    They call that mixed signals ? That's optimistic.
    Still better than NJ :

    The vacancy rate increased to 18.9 percent in 2002 from 13.9 percent in 2001," said Christopher Kinum, senior managing director of Cushman & Wakefield of New Jersey. "And the average asking rent declined to $25.92 a square foot from $26.24." In addition, he said, the pace of leasing dropped sharply to a total of 8.8 million square feet in 2002, from 15 million feet in 2001.

  4. #4

    Default State of the Commercial Market


    January 5, 2003
    In Commercial Markets, Mixed Signals

    THE real estate market in New York as the new year begins is choppy and characterized by crosscurrents. The demand for office space is soft and asking rents are declining but the retail segment in Manhattan remains strong. Investors are spending heavily for trophy buildings, but less attractive office towers draw little interest.

    An influx of capital from investors wary of the stock market and scornful of bond market yields has resulted in rich prices being paid for trophy properties filled with tenants with good credit ratings locked into long leases. But the appeal of buildings with empty space or leases set to expire in a few years has dropped abruptly, and real estate executives say many announced deals have not closed and others have quietly been withdrawn from the market.

    Some tenants are seeking to lock in the current low rents and get rid of slow-moving sublet space by persuading their landlords to take back the vacant space in return for extensions to their existing leases. Owners, in turn, have to judge whether eliminating sublet space being offered by leaseholders who are, in effect, competing with their landlords to lure new tenants will ease the downward price pressure on rents and whether the lease extensions will allow them to refinance at the current low interest rates.

    The outlook for the coming year is unclear, with some executives saying that an economic upturn could gobble up available space quickly while others are observing that such an upturn is nowhere in sight. "There is," said Robert Billingsley, vice chairman of Colliers ABR, a brokerage specializing in office leasing, "a continuum of optimism about the outlook for the market. Most people say it will get softer. The optimists say it will be for six months. The pessimists say it will be for two years."

    Peter Pattison, a real estate industry consultant, would count as a pessimist. "If we are on the bottom and I am not sure we are we are going to stay there for a while," he said. "Space is going to compete for tenants. Financial pressures will force people to put space out at what the market will pay."

    "There is a lot more space coming on the market this year, and we already have a two-year supply in inventory," said John B. Brod, a principal in PBS Realty Advisors, a small brokerage that specializes in representing tenants. "The recovery will await the national economy, which probably means not until 2005."

    According to figures compiled by Insignia/ESG, the real estate brokerage and services company, the overall vacancy rate in Manhattan stood at 11.8 percent at the end of the third quarter of 2002, compared with 8.4 percent a year earlier and just 3.8 percent at the height of the market in 2000.

    The overall asking rental rate in the same time had fallen to $44.66 a square foot annually, from $50.75 a square foot a year earlier and $52.67 in 2000.

    In spite of the declines, many real estate executives said the New York leasing market is strong compared with many other cities across the country. "We are well below the national average for vacancies, which is 16 to 17 percent," said Bruce Mosler, the president for United States operations of Cushman & Wakefield, the brokerage and services company with headquarters in New York.

    Sublet Space
    Tenants Compete With Landlords

    One continuing peculiarity of the office market in Manhattan is the large amount of sublet space. This is space being offered by tenants whose needs have shrunk or have not grown as much as expected, often in competition with space in the same building being offered directly by the landlord. "Sublet space is about one-third of the market, about 18 million square feet of the 55 million square feet available," said James Meiskin, the president of Plymouth Partners, a brokerage that represents tenants.

    Since the original tenants of the space being offered for sublet are, in general, still paying rents, they have an incentive to cut the price to gain a subtenant and reduce their total rent bills. This has a downward impact on overall rental rates.

    Some real estate executives said the current situation with sublet space is reminiscent of the late 1980's and early 1990's, when a spate of new construction brought millions of square feet of space onto the market as demand was softening.

    "Sublets can carry a discount to direct space," said Robert J. Alexander, vice chairman of Insignia/ESG. With financial industry companies laying off thousands of workers, well finished space is now available on good terms. "If you can get a relatively long-term sublet from an institutional financial firm with good credit, that's not such a bad bet."

    But Barry Gosin, the chief executive of Newmark & Company Real Estate, a brokerage and management company, said comparisons with the late 80's and early 90's are overblown. "The real estate market today is much better off than it was then because there has been no speculative building," he said.

    He noted that a lot of the empty space in places like Midtown south of about 34th Street are in formerly industrial buildings that were not even considered part of the office market two decades ago. Pointing to massive former industrial sites on the West Side, he said, "There is 120 million square feet of space in buildings like 111 Eighth Avenue and the Starrett-Lehigh Building that did not exist 20 years ago."

    Buildings for Sale
    A 'Bifurcated' Market for Investors

    Even as the leasing market continues in the doldrums, investors are paying top dollar for selected buildings. Real estate executives say that this is because alternative investments, like the stock market, provide uncertain prospects for returns and investors have developed a taste for things they can see and touch.

    But the market for these properties has grown increasingly divided, with buildings that are fully occupied with tenants on long-term leases who have strong credit ratings drawing top bids, while those with vacancies and a lot of leases likely to expire in a few years are attracting little attention.

    "The market is bifurcated in two ways," said Warren M. Heller, an executive managing director for investment sales at Insignia/ESG. "First, there are one and a half markets nationally that investors are interested in: Midtown Manhattan and Washington, D.C."

    And in those markets, investors are seeking properties that look like bonds in that they guarantee a steady, predictable return on investment. Such sites are almost fully leased to companies that are highly likely to pay the rent on their long-term leases. "If you have a building that looks like a bond, there is an infinite amount of capital to bid for it," Mr. Heller said.

    The deal most often cited as being in this category is the sale of 399 Park Avenue to Boston Properties for $1.06 billion, or $626.85 a square foot. The building is 100 percent leased to two leading financial institutions on long-term leases.

    "That building had Citigroup and Lehman Brothers committed to long-term leases, which made it an extremely attractive investment," said Timothy J. Welch, an executive managing director of Cushman & Wakefield. "It was clearly like a bond, with very stable return of 8 to 9 percent a year, compared with 4 or 5 percent" in the conventional bond market, he said.

    But investors are no longer willing to buy vacancies in hopes of renting spaces at higher rates as they were a year or two ago, said Anthony E. Malkin, the president of W&M Properties, the operating affiliate of his family's investment syndicates. As a result, he said, "a lot of deals have gone bust" as prospective buyers could not secure financing to close the transactions.

    "The market has hit reality," said Leslie W. Himmel, a partner in Himmel & Merringoff Properties, an investment company. "You can see the correction; the velocity of deals is off and properties are being taken off the market." She said many owners are still trying to get sales prices of $300 a square foot that may have been justifiable when annual rents were in the $40's, but which are not with rents in the $30's.

    The 18.5 percent increase in city property taxes is also helping to chill the investment sales market, by threatening to increase owners' costs as leases expire, Ms. Himmel observed. "The increased taxes can generally be passed on to tenants, but when leases expire, a lot of landlords are going to be hit hard," she said.

    Record-low interest rates are providing an alternative for landlords who cannot sell for the price they want or do not want to face the tax consequences of a sale. They can pull their own capital out of a property by refinancing the debt and locking in a low rate.

    For many hard-pressed property owners, this is a way to hold on to properties they might otherwise lose to lenders. "For some people, refinancing is not an alternative to selling; it is an alternative to getting wiped out," Mr. Heller said. "With vacancies up and rents dropping, refinancing lets an owner cover up and wait for a better day. It extends the life of owners who otherwise would have lost properties."

    The desire to make properties suitable for refinancing may help clear the overhang of sublet space by inducing landlords to take back space being offered by tenants in return for the tenants' signing of long-term renewal leases for the space they are occupying, real estate executives said.

    "I think we are going to see the recasting of leases this year with a twist," said Robert Freedman, vice chairman of GVA Williams, a brokerage and services company. If a tenant occupies, say, 250,000 square feet with three to five years left on the lease and also has 50,000 square feet vacant and being offered for sublease, conditions are ripe for a deal, he said.

    To induce such tenants with strong credit ratings to extend leases on the spaces they are occupying, landlords may be willing to take back the sublet space, which they can market directly, Mr. Freedman said. "With a short-term lease, you have a wasting asset, but with a long-term renewal, an owner can monetize the asset," he said.

    The arrangement has benefits for tenants as well, Mr. Freedman said. Not only are they freed of the obligation to pay rent on space they do not need, but they can clean up their balance sheets by eliminating the lease obligation on the space taken back by the landlord. "These are silent workouts that are happening because landlords want to lock in cheap money for the long term," Mr. Freedman said.

    Following are developments in other sectors of the commercial property industry:

    Suburban Offices
    Vacancies Continue to Increase

    The office market in northern New Jersey, by some measures the fourth largest in the country, reflects the overall economic slowdown in the region and big cutbacks in the telecommunications industry.

    "The vacancy rate increased to 18.9 percent in 2002 from 13.9 percent in 2001," said Christopher Kinum, senior managing director of Cushman & Wakefield of New Jersey. "And the average asking rent declined to $25.92 a square foot from $26.24." In addition, he said, the pace of leasing dropped sharply to a total of 8.8 million square feet in 2002, from 15 million feet in 2001.

    He said that as more telecommunications space comes to the market this year amid job cuts, there will be downward pressure on rental rates. "I have never seen this market go more than 18 to 24 months without an uptick," he said, "but this may be different. I keep reading that the recession is over, but I don't see it."

    The industrial sector of the market, which largely means warehouses and distribution centers, has slowed as well, Mr. Kinum said. "There has been a big slowdown in speculative building of big boxes along the Turnpike and in the Meadowlands," he said. "Build-to-suit is the way to get financing today."

    Nevertheless, capital continues to pour into the state, seeking investments in commercial and industrial real estate, said Andrew J. Merrin, executive vice president for investment at Cushman & Wakefield. "We actually call it the paradox," he said.

    "There are a number of things going on here," he said. "First, there is disenchantment with Wall Street, and pension funds are increasing their allocations for real estate. Second, with the low interest rates, financing is about as good as it gets. And, third, the presence of all this capital is driving product that you would not ordinarily see onto the market."

    In the boroughs of New York City, uncertainty about what will be built in downtown Manhattan and the sublet overhang in the rest of Manhattan is likely to limit development, even in areas like Long Island City that have been rezoned for more intensive development, real estate executives say.

    "Our affiliate, Octagon Properties, just bought 10 one-story buildings near the base of the 59th Street Bridge," said Frank Zuckerbrot, an executive vice president of Sholom & Zuckerbrot, a brokerage specializing in property outside Manhattan, most of it in Queens. "Some of them are contiguous, so there is potential for development, but it is our intention to operate them as industrial properties for tenants serving customers in Manhattan," he said.

    The rezoning aside, he said, most development sites in the area have not been assembled, and he said there will be little incentive to do so until it becomes clear what is going to happen in Manhattan.

    Vacancies continued to rise in Westchester and Fairfield Counties although overall asking rents have not declined significantly. However, concessions by landlords, such as periods of free rent, have cut effective rents in some submarkets, according to Jeffrey Dunne, an executive vice president in the Stamford office of CB Richard Ellis.

    "Asking rents are just that," he said. "In some places they are being achieved, and in some they are not." Landlords in Greenwich have been among those most reluctant to offer concessions, he said.

    Retail Space
    Demand Stays Strong in Manhattan

    In spite of a soft leasing market for office space, demand for retail space remained strong as consumers continued spending and new stores sought to enter the rich Manhattan market. As a result, rental rates have held their previous levels or even increased in some locations.

    "The international and national tourists have returned, and there is retail activity all over town," said Faith H. Consolo, vice chairman of Garrick-Aug Associates, a brokerage specializing in retail space. One new entrant last year, she said, was Best Buy, the big electronics operation that opened a store at 23rd Street and the Avenue of the Americas and is building out another at 86th Street and Lexington Avenue.

    "The retail market has been consistent," said David A. Green, executive director of the retail group at Insignia/ESG. "Demand has been sufficient to take up the available supply, so pricing has gone up."

    He said demand was coming from sources as diverse as four banks Commerce, Fleet, Washington Mutual and North Fork that seem determined to have a branch in every neighborhood in the city, to DeBeers, the diamond company, which is opening its first store in this country in the St. Regis Hotel at 55th Street and Fifth Avenue.

    He noted that SoHo, which suffered from a lack of tourist traffic after the terrorist attack, seems to be making a comeback, with Bloomingdale's planning to open a 125,000-square-foot store at 504 Broadway, a space formerly occupied by a Canal Jeans store. Other new entrants to SoHo, Ms. Consolo said, were the Puma and Adidas shoe stores and the Crate & Barrel and Sharper Image houseware stores.

    Downtown, retailers displaced from the World Trade Center sought new locations to tap what remains the nation's third largest central business district, after Midtown Manhattan and Chicago. Notable was the deal to place a 33,000-square-foot Borders bookstore at 100 Broadway at Pine Street.

    Broadway may become the main retail avenue in Lower Manhattan, said Richard Hodos, the president of Madison HGCD, a brokerage specializing in retail properties. "The area will not be successful if people place stores here and there," he said. "You need to have a concentration to provide synergy, and Broadway is a natural corridor for retail."

    Borders started looking for a new location soon after its 40,000-square-foot, three-level store in the base of the Trade Center was destroyed in the Sept. 11 attack, said Virginia M. Pittarelli, a senior vice president of Madison. "Borders considered itself part of the community and there was no question about replacing their flagship store," she said. "Within 90 days after 9/11 we were analyzing the market to find a new location."

    Suburban malls appear attractive as well. Near the end of last year, the Mills Corporation of Arlington, Va., announced that it was purchasing the 885,000-square-foot Galleria at White Plains in Westchester County and the 637,000-square-foot Riverside Square in Hackensack, N.J.

    Mills, a real estate investment trust, is also one of three finalists in the competition to redevelop the Meadowlands Sports Complex in northern New Jersey. Mills has joined forces with a New Jersey-based REIT, the Mack-Cali Realty Corporation, in advancing its proposal.

    Lower Rates Mean Higher Occupancy

    New York's hotel operators have largely succeeded in filling the rooms that were left vacant after 9/11 by domestic and foreign tourists who were reluctant to visit the city. They did so, largely, by cutting room rates to attract customers. As a result, their revenues fell sharply.

    "Hotel operators have been increasingly successful in inducing people to come here by offering great rates," said Sean Hennessey, director of the New York area hospitality consulting practice of PricewaterhouseCoopers, the accounting and consulting firm. "But the business is hobbling along."

    He said the outlook for next year is for small gains in occupancy and revenue, although 2003's first quarter will look especially good because the occupancy rate early last year was an unusually low 64 percent.

    Over all, the estimated occupancy rate for all of 2002 was 74 percent, compared with 73.3 percent in 2001, but a far cry from the virtually-sold-out rate of 83.9 percent in 2000. The average room rate last year was an estimated $185 a night, a decline from the average of $192 in 2001, which included nine months of normal business before the attack, and well off the record $222 in 2000.

    A more telling statistic is revenue per available room, which combines both room rates and vacancies. That was $137 in 2002, down from $141 in 2001 and $186 in 2000.

    The outlook for this year, Mr. Hennessey said, is for occupancy to improve to 76 percent, with an average rate of $192 a night and revenue per available room of $142.

    He said hotel managers would be seeking to re-establish relations with corporate customers who are less sensitive to price and trying to wean themselves from dependence on tourists scanning the Internet for bargains. *

  5. #5

    Default State of the Commercial Market,2667484.story

    Brokerage: Office Market on Upturn
    By Alan J. Wax

    January 8, 2003

    There are signs of stability in the sagging Manhattan office market, officials of a leading commercial real estate brokerage said yesterday as they forecast an upturn this year in the fortunes of downtown.

    Cushman & Wakefield officials told a news conference that after two years of rising vacancy rates and falling rents, year-end vacancy figures suggest the market is stabilizing.

    "The fundamentals are not so bad," said Ken Krasnow, senior managing director and head of Cushman's New York office, noting the office vacancy rate for Manhattan finished 2002 at 12 percent, compared with 11.8 percent three months earlier. He forecast that the rate by year-end 2003 would be 12.1 percent. "We're beginning to slowly climb out of the malaise."

    The Manhattan figures, Krasnow said, look good, compared with the 14.8 percent national average.

    Vacancy rates in Manhattan have risen for eight consecutive quarters. The rate stood at 4 percent at the end of 2000 and 9 percent a year ago.

    In the lower Manhattan market, hard hit by the downturn in the stock market, Cushman predicted the office vacancy rate would rebound from 13.2 percent at the end of 2002 to 11.6 percent by the end of this year, as government incentives fuel a surge in leasing. Downtown vacancies fell to 13.2 percent from 13.4 percent in the third quarter, still above the 9 percent of a year ago. Rents fell to $39.17 a square foot from $39.79 in the third quarter and $39.45 at the end of 2001.

    Krasnow said that businesses, reluctant to expand or that have put excess space on the market, will take the space off the market as business rebounds.

    In midtown, the vacancy rate was 11.1 percent in the fourth quarter, up from 10.7 percent at the end of September and 9 percent a year earlier. Average rents fell to $48.15 a square foot from $49.15 in the third quarter and $52.83 a year ago. Cushman expects midtown vacancies to climb by a percentage point as new office projects - AOL Time Warner Center, 300 Madison Ave. and Times Square Tower - are completed.

  6. #6

    Default State of the Commercial Market

    Is any of this info slanted, or has any of it been slanted by various agencies or groups, *that anybody can tell?

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