Manhattan’s office vacancy rate jumped the most since 2009, when the market was reeling from the U.S. credit crisis, as financial companies cut jobs and tenants held back from taking space amid concern the economy will slow.
The rate reached 9.6 percent in the third quarter, an increase of 0.6 percentage points from the previous three months, Cushman & Wakefield Inc., a New York-based commercial real estate services firm, said in a report today. That was the biggest jump since the third quarter of 2009, when the bankruptcy of Lehman Brothers Holdings Inc. and its aftermath spurred a surge in vacancies in the largest U.S. office market.
The recent increase in empty space reflects job cuts in banking and finance, the city’s biggest private office-using industry, according to Ken McCarthy, senior economist at Cushman. Financial-services companies eliminated about 9,600 jobs in New York from May to August, he said in an interview, citing data from the U.S. Bureau of Labor Statistics.
“It’s a function of the overall economic climate we’re in, with a lot of uncertainty,” he said. “Financial-services firms are not expanding right now. In that environment they’re not about to go out and lease more space.”
The U.S. elections and the so-called fiscal cliff -- tax increases and spending cuts set to take place at the end of the year unless Congress acts -- along with Europe’s debt crisis, are “causing what I would call the large corporate user to be risk-averse,” McCarthy said.
The rise in vacancy was enough to push New York to second behind San Francisco for the tightest U.S. office market. It was the first time since 2000 that Manhattan had a larger share of empty space than the West Coast city, which had a third-quarter vacancy rate of 9.1 percent, Cushman said.
In Midtown, the most expensive U.S. office submarket, the vacancy rate rose to 10.5 percent in third quarter from 9.8 percent in the previous three months, according to Cushman. The increase was driven in part by the bankruptcy of law firm Dewey & LeBoeuf LLP, which left about 400,000 square feet (37,000 square meters) at 1301 Avenue of the Americas, just north of Rockefeller Center, McCarthy said. In lower Manhattan, the rate rose to 9.3 percent from 8.9 percent.
In midtown south, the area roughly between 30th and Canal streets that’s popular with media and technology companies, the vacancy rate climbed to 6.6 percent from 6.1 percent in the second quarter, according to Cushman. It remains the tightest office market in the U.S., the company said.
The increase in empty space is an “anomaly” that doesn’t mean midtown south is cooling off, McCarthy said.
“As renewals occur, what we’re seeing is probably some space coming back to the market, either because the tenant can’t afford it or the landlord wants to raise the rent,” he said.
Cushman’s vacancy data include both empty space and offices that will become available in the next six months. The uptick in midtown south’s vacancy rate stemmed from about 425,000 square feet mainly in four buildings that are poised to have availabilities. Those properties are 770 Broadway, 350 Hudson St., 110 Fifth Ave., and 11 Madison Ave., the brokerage said.
The information companies that have been flocking to midtown south have a different perspective from banks and more traditional corporations on their office needs, McCarthy said.
“Tech firms, in their space, the demand is healthy and as a result they’re growing,” he said. “They’re in in a world right now that is more willing to take on risk, more willing to take on new employees and therefore to lease more space.”
Landlords with large vacancies or developments in progress -- such as Brookfield Office Properties Inc., Silverstein Properties Inc. and Related Cos. -- would be wise to cater to the demand from so-called creative companies, which have started to shop for space outside midtown south, said Steve Coutts, senior vice president for research for brokerage Studley Inc.
The new projects are “needed even though the availability is increasing,” said Coutts, whose company specializes in representing tenants. “It’s very important to these tech and creative companies to the extent that these spaces offer open floor plans that they’re looking for.”
Brookfield is offering about 3 million square feet at downtown’s World Financial Center, including much of what was Merrill Lynch & Co.’s former world headquarters. Across the street, Silverstein has about 1.2 million square feet available at 4 World Trade Center, slated for completion by early 2014. The Port Authority of New York and New Jersey has about 1.4 million square feet available at 1 World Trade Center, and Related has plans to build about 6.3 million square feet of offices at its Hudson Yards project on Midtown’s far west side.
Manhattan rents sought by landlords were little changed in the third quarter, declining to $58.83 a square foot from $58.86 in the second quarter, Cushman said. Asking rents in Midtown were $66.42 a square foot, compared with $66.44 the previous three months. In midtown south they fell to $49.12 a square foot from $49.43, and downtown they dropped to $39.83 from $40.06.