There’s a shift happening in the commercial real estate market right now. It’s hard to articulate exactly what it is (so hard, in fact, that this post has taken me 3+ weeks to write.) However after 3 weeks and a few rounds of edits, I have my ideas in order. Alas:
- The overall market is stable despite an increasing amount of press to the contrary (my response here).
- The high end market (availabilities asking above $100 per sq. ft.) currently has a supply / demand problem and may be in a bit of a bubble.
- For reasons to be discussed, the first half of 2016 has seen more renewals and less relocations.
- The future looks more flat/range-bound than drastically up or down.
There are numerous major (larger than 100,000 sq. ft.) leases being negotiated in Midtown, Midtown South and Downtown. That is a sign of a healthy market. While it feels that more signs point to flat or down than continued upward movement, that is not a bad thing. When thinking of the stock market, bull markets – which are healthy markets – typically correct through price or time. That is where I believe we are now – entering the period of consolidation. This is exactly what happened between 1981 and 1989 when Midtown average asking rents went from $40.00 to $41.91 (+ 4.78%) over 8 years after increasing dramatically (260%!) the 7 years before. Just because the last upward cycle ended in a 29% drop in Manhattan average asking does not mean the end to this rally will be the same. Brokers must suspend their recency bias.
Despite a healthy market overall, it’s true that the high end market may be in a bit of a bubble. For blocks of 50,000 sq. ft. and greater asking over $100 per sq. ft., there is over 4M vacant space available today or within the next 12 months. Based on current demand, that is a big mountain to climb. It’s to be determined if demand for that space picks up or we see a repricing of some of these availabilities. But it’s also important to remember that this is only one subset of the overall market.
Regardless of where the market may be going, the first half of 2016 has already seen some real changes. Most notably is the decrease in relocations compared to 2015. This is a result of two things: 1) the increase in construction costs making building out new space very costly for tenants and 2) an increased awareness among landlords about current supply & demand. Because tenants don’t want to spend capital to build out new space, and because landlords don’t want to expose themselves to large and/or high-priced availabilities, tenants and landlords have been coming together to make a deal. As of today, there have been 163 relocations in Manhattan for a total of 3.32M sq. ft. compared to 179 relocations for a total of 6.01M sq. ft. during the same period in 2015. This is big. I’ve personally completed 3 renewals (two spelled out here and here) and my team has worked on 5.
If interested in discussing more or seeing any of the backup data to these numbers, please e-mail me at [email protected] to arrange a time to connect. I’m 4 years removed from College but writing this has felt like a midterm on everything you’ve learned in the first half of the year (not an easy task!)
Now back to business.