Sept 5, 2008
By: Paul Rosta, Senior Associate Editor

After a typically quiet summer, a souring economy and struggling financial markets will soon cause the other shoe to drop on the Manhattan office market, according to local analysts.

Just Friday, atop other discouraging economic trends--such as the apparent shift by consumers to big-box stores from high-end retailers--came the jobs report. The Department of Labor’s monthly report released Friday found that non-farm payrolls dwindled by 84,000 as unemployment hit 6.1 percent, the worst showing since 2003.

Some financial firms that make up a large chunk of the market’s tenant base are in trouble, and their problems will soon start add space to the market. Lehman Bros., the troubled investment bank that may be sold in part or in whole, is rumored to be marketing about 500,000 square feet of sublease space at 1271 Avenue of the Americas, a Midtown Manhattan trophy tower. “I believe we’re going to continue to see that (kind of activity) throughout the fall,” predicted Robert Sammons, managing director for research at Colliers ABR Inc., the Manhattan-based affiliate of Colliers International.

Also in the mix is the pharmaceutical giant Pfizer, which may market 750,000 square feet of sublease space at its Third Avenue campus. Goldman Sachs Group and Bank of America will also return space to the market when they occupy their new towers in Downtown and Midtown Manhattan, respectively, Sammons added. “The one saving grace in the New York market has been media,” he said. For example, Fox Interactive Media is taking 39,000 square feet at 485 Lexington Avenue in Midtown, and Vibe Magazine is relocating to 18,500 square feet Downtown at 120 Wall Street.

Sammons is standing by an earlier estimate that the Manhattan office market vacancy rate will inch up to 10 percent by the end of the year. As of August, vacancy stood at 8.7 percent for all classes. Although Midtown Manhattan vacancy held firm at 7.2 percent for the month, average Class A asking rents slipped to $96.10 per square foot, marking a 3.1 percent decline since the record $99.22 price in May, according to Sammons.

Asking rents are likely to lose more ground by the end of the year, but Sammons noted that the declines would follow several years of a tightening office market and skyrocketing prices. “I’m sure (landlords) would prefer a 4 percent vacancy rate to an 8 percent vacancy rate, but even at that (higher) rate, it’s not the end of the world,” he said.

One factor in landlords’ favor is the limited new office product on the horizon. The massive towers in the early stages of construction at the World Trade Center, for example, will not come on line until early in the next decade, when market conditions will almost certainly be strikingly different.