Hi All,
Leasing activity is off to a great start this year. Deals for a total of 3 million square feet of commercial office space were signed in February. That's only the sixth time that's happened in the city since 2002. February's blowout performance follows the impressive 2.6 million square feet of space leased in January. Leasing activity has now surpassed the nine-year monthly average of 1.9 million square feet for six months in a row.
The early 2011 deal closings have resulted in a wave of large block transactions. The recent 400,000 square foot Bloomberg deal at 120 Park avenue has forced smaller users to find alternative options. Household name companies with A ratings are subject to getting bumped by larger tenants who have finally returned to the market in deal making mode. In addition, the unexpected turn of events of Nomura Securities and Deloitte to abandon the downtown World Financial Center for midtown has accounted for another 1.0 million square feet of demand and absorption of Class A space in midtown.
These recent events coupled with the addition of more large block transactions in have caused most Midtown landlords to increase their asking rents. Smaller tenants who have been bounced for the larger transactions are scrambling to find alternatives which may not be as economical as the original locations.
If the roaring pace holds up, 2011 could go into the records as the best year ever in the Manhattan office market. The record was set in 1998, when 33.1 million square feet were leased. A combination of pent-up demand and companies renewing or moving early to take advantage of recession-lowered rents is driving the activity. However job growth needs to continue for leasing activity to keep up its muscular pace. So far, New York has regained 40% of the 140,000 jobs lost during the recession. But given the upheaval in international economy over the past few weeks, it is difficult to predict what the demand for space will be over the next several months.
Recent events
Much of the news over the past few weeks revolve around the natural disaster in Japan as well as the political upheaval in the Middle East and North Africa. It is, therefore, of great interest to understand how this will effect the New York City commercial real estate market.
The political instability in Bahrain could spill into Saudi Arabia which is a large oil producer thus decreasing word oil supply. Additionally, the supply of oil could be decreased as a result of the situation in Libya. Additionally, the supply of oil in the United States is lower than anticipated. So we are faced with a potentially large worldwide decrease in oil supply.
Although the Japanese disaster will lead to a decrease in energy demand, the damage to the nuclear reactors will result in an increase in oil demand to make up for the lost nuclear output. So while world supply is decreasing, Japan's oil demand is increasing. The result could be increases in demand for oil and limited supply leading to above $4.00 prices for gas.
The expected increase in the price of oil and gas, which is an input to production of goods and services, will lead to a slowdown in the economy. Most analysts agree if oil prices stay around $100 per barrel for the rest of this year, that will shave US GDP growth by only one-half percent or less for the year. If correct, which remains to be seen, this will cut US GDP growth from a 2.8%-3.0% rate to around 2.5% or slightly lower. Obviously, this will drive the unemployment rate back up later this year and/or next year.
The slowdown in economic growth from the increase in oil will translate to less hiring and to less demand for office space and retail space for tenants. The lower demand for space negatively effects landlords which rely on growing tenant space demands to increase rents.
However, while the demand for office and retail space may be negatively effected by the slowdown in the economy resulting from a increase in oil prices, there are other factors resulting from oil price increases that will benefit commercial real estate. Inflation is likely to increase as higher oil prices are factored into the production of goods and services.
Real estate is a bundle of assets and including factors of production such as natural resources (concrete and steel), land (development site), labor (construction costs) and financing costs (bank loans). As oil prices increase so do the prices of the aforementioned real estate costs. Thus, real estate prices tend to rise and act as a hedge against inflation.
Additionally, as the economy moves toward an inflationary environment, landlords seek more aggressive formulas to recover higher costs. A landlord may typically accept a simple and low fixed rent increase. However, in an inflationary environment the landlord has the ability to pass on higher expenses to the tenant though a number of innovative means including variable rent increases based on such external metrics, as the consumer price index which reflects the national inflation rate, or the porters' wage increase, which is a local union contract staple that raises the pay scale of building maintenance workers. Therefore, the landlord benefits from an inflationary environment through higher asset prices and the ability to generate additional revenue through hidden cost increases.
Although the US domestic economy may be hurt by the slowdown in growth resulting in higher oil prices, New York City is an anomaly in that 40% of the office leasing market is comprised of financial services companies. Many financial services companies may actually benefit from the instability in the international markets caused by the increased volatility in oil prices and in the markets overall. So, higher oil prices may not impact financial services hiring as it would other industries.
In conclusion, while the national economy may slow as a result of oil increases, there are other factors offsetting this that will benefit the commercial real estate market. Real estate is a hedge against inflation and real estate asset prices and rents are likely to rise in the face of an economic slowdown. Moreover, Manhattan is highly tied to financial services which may actually benefit from volatility in the international stock and bond markets. Thus, we are likely to see the Manhattan office market remain steady and continue to improve in the near future. Please note that these are my personal views and just food for thought.
My team and I have been very busy in the market. We are in the process of closing several deals totalling over 50,000 square feet in the next few weeks. Additionally, we are in the process of being hired to represent tenants for over 200,000 square feet of space.
As discussed, there is a growing sense that prices will rise and many large tenants see the need to lock into long term favorable rates. The New York City economy is improving and the time to act is now! We have achieved great benefit for our tenants in this changing market environment. Please feel free to contact us in regard to how we can help you meet your real estate needs and take advantage of opportunities in the changing market. Twenty minutes can save you twenty percent or more on your real estate costs. Thanks.
All my best,
Joseph
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