NORTHEAST SNAPSHOT, APRIL 2008

New York City Office Market

Siderow

Damon Runyon, who knew a thing or two about the ups and downs of life in New York, once remarked, “The battle is not always to the strong, nor the race to the swift. But that’s the way to bet!” His sage advice reminds us that investors counting on the strength of Manhattan’s office market are taking fundamentally favorable positions on the risk/reward spectrum as real estate cycles move forward.

In early 2008, all eyes seem to be focused on the gyrations of the stock market and the turmoil of the credit markets as they unwind positions in exotic and deeply flawed debt derivatives. Ironically, commercial  real estate emerges against this background as an exceptionally attractive investment alternative. Manhattan office buildings are well-leased, generating exceptional levels of cash flow, have strong potential for increasing income as early 2000s’ leases expire and are adjusted to current market-rate rents, and face minimal supply additions for the next 3 or 4 years. In fact, until the rebuilding of the World Trade Center is completed, large blocks of leasable space will be scarce. The enormous 500 million-square-foot  Manhattan market has a vacancy rate of just 5.3 percent, and absorbed 4.6 million square feet of space in 2007 alone.

Some observers fear a 2008 repeat of the post 9/11 debacle, where panicked companies threw millions of square feet onto the sublet market. The subprime mess, they reason, is triggering such massive write-downs on Wall Street that huge layoffs must ensue, with dire consequences for the space market. The investment bankers are not that ignorant or short of memory. They have learned the expensive lesson that the space they gave up in 2002 and 2003 needed to be leased all over again in 2005 – 2007 — at much higher rents. Moreover, the recent surge of foreign funds buying ownership stakes in New York’s commercial and investment banks represents a shrewd bet that the stock market has overcorrected in driving share prices down, and that renewed growth rather than sustained shrinkage is the story for the Manhattan financial industry. That is a critical matter, since finance occupies 28 percent of New York’s office space.

The smart money is bullish on New York, if investment transactions at the end of 2007 and into January 2008 are any indication. No fewer than five properties traded in the past four months at prices above $1 billion — yes, that’s with a “B.” Institutional investors like TIAA-CREF and CalSTRs, international buyers from Europe, Asia, and the Middle East, and experienced local real estate companies including Silverstein Properties, SL Green, and our own firm, Murray Hill Properties, have closed major deals in the autumn and winter months. It is not an accident that, according to Real Capital Analytics, more than $40 billion in Manhattan office acquisitions were done in the past 12 months — 19 percent of all office investment in the United States. Damon Runyon would understand why.

— Neil Siderow is a founding partner of Murray Hill Properties/TCN Worldwide

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