FEATURE ARTICLE, APRIL/MAY 2009

NEW YORK AND NEW JERSEY OFFICE UPDATE
Our experts weigh in on the office climates in their respective markets.

New Jersey Office Update

Loughlin

Daniel J. Loughlin is managing director and broker lead for Jones Lang LaSalle in Parsippany, N.J.

NREB: How would you characterize the general office market conditions in New Jersey?

Loughlin: Overall vacancy in New Jersey has edged higher by 0.7 percentage points since the close of 2008 to 23.8 percent, the highest quarter-over-quarter increase in 2 years. The increase is mainly attributed to additional sublease space added to the market. Through the first 3 months of 2009, there were four blocks of sublease space in excess of 50,000 square feet placed on the market.

Quarter-over-quarter, the overall average asking rental rate fell 2.8 percent, or $0.69 per square foot to $24.35 per square foot, its lowest level in 4 years and the sharpest quarter-over-quarter decline in almost 6 years.

Renewals continued to make up the majority of completed leases during the first quarter of 2009. However, the top three transactions completed year-to-date were all new leases and all exceeded the 100,000-square-foot mark. Leasing activity measured more than 1.6 million square feet during the first quarter, a 39 percent decline from the total recorded at this time last year.

The market is in a state of “musical chairs” where companies are constantly searching for the best value opportunity. This may include restructuring their existing leases, taking advantage of sublease opportunities and/or some of the New Jersey-based economic incentive packages such as the Urban Transit Hub Tax Incentive program.

NREB: Effects of the current economy on the office sector in New Jersey?

Loughlin: The big underlying issue is a lack of real tenant demand. The current economic climate has caused many companies to either downsize, consolidate, or, more importantly, put major real estate decisions on hold until market conditions improve overall. As a result, leasing velocity is down.

NREB: What are the current vacancy rates?

Loughlin: Jones Lang LaSalle tracks Class A and B office locations in Northern and Central New Jersey. Currently, there is a 20.3 percent vacancy rate and a 26.4 percent vacancy rate for Class A office properties in Northern and Central New Jersey respectively. There is a 21.6 percent vacancy rate and a 30.9 percent vacancy rate for Class B office properties in Northern and Central New Jersey respectively. In total, there is an average of 23.8 percent vacancy amongst both Class A and B locations in Northern and Central New Jersey.

NREB: How much sublease space has come on the market?

Loughlin: During the first quarter of 2009 more than 800,000 square feet of sublet space was added to the market. Some of the largest block of space included 156,000 square feet  at 400 Crossing Boulevard, 112,000 square feet at 440 Route 22 East, 63,000 square feet at 80 Park Plaza and 54,000 square feet at 50 Milstone Road.

NREB: What are the current rental rates?

Loughlin: Quoted gross rent for Class A buildings in Northern and Central New Jersey is $27.60. Quoted gross rent is $21.09 for Class B buildings in Northern and Central New Jersey. The total average is $24.57.

NREB: Are more concessions being offered?

Loughlin: Yes, landlords are becoming much more aggressive in what they are offering, but tenants need to know that there is a limit to what a landlord can comfortably offer based on their financial position with that asset. In many cases, there is a real opportunity for both parties to develop a solution that stabilizes their respective positions.

NREB: How are current and future office developments being affected?

Loughlin: Many development projects have been put on hold until the economy picks up or an anchor tenant is found. However, there is one gleaming opportunity, the Urban Transit Hub Tax Incentive program, which we think is so financially compelling that it will create new development in designated and qualified urban areas and enable companies to develop attractive and sustainable workplace environments.

NREB: What is the outlook for the New Jersey office sector for the remainder of 2009 and on into 2010?

Loughlin: The remainder of 2009 will be challenging. We expect to see more unemployment issues in the coming months, which will continue to negatively impact office space demand, increase vacancy rates and create additional stress in the office building ownership community.

NREB: Can you speculate on a turn around? 

Loughlin: We hope and expect to see improvements consistent with other economic forecasts that indicate improving market conditions in mid-2010.

Manhattan Office Update

Lilien

Stuart Lilien is executive vice president of The Lansco Corporation in New York City.

NREB: How would you characterize the general office market conditions in New York City?

Lilien: The overall Manhattan office leasing market is weak without any evidence that a turn around, or even a leveling off is in sight.

NREB: Effects of the current economy on the office sector in Manhattan?

Lilien: The largest users of office space have been commercial banks, investment banking companies, hedge funds, private equity companies and law firms. They were also the tenants paying most of the highest rentals in the City. We have witnessed the devastation of all the major commercial banks with the very survival of most of them being determined by the U.S. government. These institutions have terminated many thousands of employees with more layoffs to come, which will necessitate a drastic reduction of the amount of required office space.

The investment banking industry is still shell-shocked with Bear Stearns, Lehman Brothers and Merrill Lynch either going “belly-up” or being absorbed by commercial banks, which will shrink their operations. Numerous hedge funds are closing up or shrinking their operations, due to redemptions and major losses. The vast majority of those that survive will be reducing the number of employees and the amount of office space they utilize.

We have witnessed the demise of several large national law firms with the likelihood of several more firms suffering the same fate over the next 12 months. Even many law firms that continue to thrive have been thinning their ranks of attorneys and reducing their support staff to maintain profitability.

When your largest space users and also those willing to pay the highest rentals are in a cost-cutting, survival mode, New York City faces an extremely difficult period that has risks not seen since the last depression.

NREB: What are the current vacancy rates?

Lilien: In midtown Manhattan, vacancy rates are approximately 9 percent. The amount of available space coming onto the market is in excess of 13 percent with average asking rental rates sitting at approximately $67.25 per square foot.

In Midtown South in Manhattan, the vacancy rate is also approximately 9 percent, and the amount of available space coming back onto the market is just slightly lower at approximately 12.75 percent. Asking rental rates are approximately $48.50 per square foot.

In the Downtown Manhattan market, vacancy rates are approximately 8 percent and the average asking rental rate is $42.75 per square foot. The amount of available space coming onto the market is approximately 10.5 percent.

Overall, asking rentals are dropping on a weekly basis and bear no resemblance to what the rental leases can be consummated at.

NREB: How much sublease space has come on the market?

Lilien: As seen in the numbers above, sublease space is coming onto the market at a rapid rate.

NREB: Are more concessions being offered?

Lilien: Due to the softness in the market, tenants are in a strong negotiating position, and depending on their size, are able to, or should be able to, negotiate for some of the following terms:

• Significant free rental period

• Large landlord contributions for tenant installation

• Ability to return a portion of space to landlord during lease term

• Right to terminate lease prior to lease expiration

• More favorable escalation clauses

• Smaller or no rental bumps over lease term

• Expanded and more liberal subleasing rights

• Less onerous lease clauses

• Lower loss factors

NREB: How is current and future office development being affected?

Lilien: Several office building projects have been cancelled due to a lack of a major tenant or tenants. It is close to impossible to obtain financing in today’s environment without a large portion of the building being pre-leased to strong tenants. The companies developers need to obtain financing generally have other options that are or will be available in existing buildings.  Many of the owners of these existing buildings have a lot more flexibility to structure leases with more advantageous financial terms for a tenant.

NREB: What is the outlook for the Manhattan office sector for the remainder of 2009 and on into 2010?

Lilien: The outlook for the balance of 2009 and 2010 is not only weakness but also a continuation of the downward spiral. There isn’t anything on the horizon that any rational person with an understanding of the depth of the worldwide economic crises can point to with any certainty that will definitely turn this economy around.

NREB: Can you speculate on a turn around? 

Lilien: The earliest that one can think in terms of a real turnaround for the Manhattan office space market is 2011 and to make that prediction one would have to be extremely optimistic and be going with a gut feeling not based on any facts. This office market will trail the growth in the economy and when it turns I believe it will be a gradual improvement and not a robust bounce. Too many people who are predicting a turnaround prior to 2011 are dispensing conventional thinking based on prior economic downturns where we witnessed rapid bounce backs. There is a very good probability that the office space recovery will be pushed back into 2012 with a strong possibility of it not occurring even later.

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