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NYC Has Negative 4.3M YTD Absorption, But That’s OK

If the country's premier real estate market slumps, it makes everyone nervous. And there's no getting around it, NYC is hugely in the red for office absorption in 2016. But don't call it a downturn yet—as Mark Twain said, there are three kinds of lies: lies, damned lies and statistics.

NYC Has Negative 4.3M YTD Absorption, But That’s OK

The data in CBRE and Colliers Internationals' recent Manhattan office market snapshots is accurate, of course (the firms are some of the best in the biz), but some of the figures are pretty eye-popping.

CBRE's reporting that a negative 693k SF absorption in November brought year-to-date net absorption to negative 4.3M SF. Availability and sublease availability have jumped 90 basis point and 40 bps, respectively, from November 2015.

But both firms reassure us these numbers aren’t storm clouds of impending doom. 

Millions of SF did become available over the course of 2016, Colliers International executive director Craig Caggiano says, but much of it—new construction, renovation or available space in existing buildings—was expected.

NYC Has Negative 4.3M YTD Absorption, But That’s OK
Rendering of Brookfield's Manhattan West project on the Far West Side of Manhattan

More specifically, Colliers International New York research senior director Franklin Wallach says, Colliers recognizes a space as available when it's actively marketing and scheduled for tenant build-out within 12 months. That not only includes new construction like the 130k 412 West 15th St, but also retrofitted buildings like the 850k SF 390 Madison Ave, existing space like Brookfield’s 5 Manhattan West (pictured) and even subletting space like Wenner Media’s 99k SF at 1290 Avenue of the Americas and Tommy Hilfiger's 278k SF at 601 West 26th St. 

It also includes recently vacated spaces. White & Case is leaving 300k SF at the Durst Organization’s 1155 Avenue of the Americas, but this deal was closed all the way back in 2014.

Through Q3 '09, Franklin says, NYC had negative 9M SF absorption, and very few of that was new construction. Instead, firms impacted by the Great Recession began subletting their space, causing sublet availability rate to increase well past the typical 2%. Asking rents plummeted.

NYC Has Negative 4.3M YTD Absorption, But That’s OK
A rendering of L&L Holding Co.'s renovation of 390 Madison Ave.

2016 asking rents have remained relatively stable, as the space hitting the market, while outpacing demand, still remains top quality. November’s 0.9% decrease in Manhattan's average asking rents, Colliers’ report notes, was mainly due to Hogan Lovells' 207k SF relocation to the above-average-priced 390 Madison (pictured) and the addition of below-market-priced sublet space. 

“The fact that a major law firm was the first tenant to lease space in an expensive, newly renovated building in the heart of Midtown is not a harbinger of a declining market,” Craig said.

This massive lease, the report adds, was counterbalanced by the addition of Time Inc.'s 103k SF sublet at 135 West 50th St (which was, again, expected), and 94k SF at 55 East 52nd St, keeping monthly absorption rate relatively flat at positive 30k SF.

NYC Has Negative 4.3M YTD Absorption, But That’s OK

But what about the substantial drops in leasing activity? Year-to-date leasing activity, CBRE’s report reads, dropped 15% in Midtown, 25% in Midtown South and 23% in Downtown. CBRE analyst team lead Michael Slattery (pictured) says the decline may seem steep, but only when compared to 2015, which had an unprecedented amount of activity.

Besides, he says, there are plenty of deals in the pipeline and still time for them to close before the end of the year.

“We have to see how leasing plays out for the rest of the year, as there’s usually a flurry of deals near the end,” he says.

OK, but what about reports of increased concessions from office landlords? 

“I take exception with people acting like concessions [are] rising all of a sudden,” Craig says. “They’ve been steadily increasing since 2008, when average rental abatements were four months. Today, on average, tenants can expect 8.7 months.”

He also points to New York’s unemployment rate, which was 5.6% in October, 30 bps below the 5.9% recorded in August 2008, just before the Lehman Brothers’ collapse.  

Neither firm can deny things aren’t as good as 2014 and 2015, but both remind us that those years were so impressive and unprecedented that it’s a high-water mark we shouldn’t expect to match or surpass every year.