Service sector to support future growth.
In the near term, further employment loss is expected as the consolidation within the commercial banking sector continues and as further layoffs occur in the manufacturing, construction and public sectors. The Port Authority of New York-New Jersey projects a 3.3 percent decline in New York City employment in 1992. The services sector is expected to be the major growth force in the local economy in the mid-term, with increased activity expected as a result of the national economic recovery. New York's status as an international financial center is expected to strengthen in the mid to long term, as the need for a New York presence by regional and foreign banks increases. The projected long-term growth in the services and financial services sector should support stable economic growth, as should trade, telecommunications and tourism opportunities with the expanding Western European, markets and the newly opened Eastern European and Latin American markets.
The first quarter 1992 primary vacancy rate in Midtown of 17.2 percent reflects an increase over the year-end 1991 vacancy rate of 16.8 percent due to the completion of two office buildings totalling approximately 1.8 million square feet, of which approximately 68 percent is available. The projected 1993 completion of the only major development under construction in Midtown, totalling approximately 306,000 square feet, coupled with a projected increase in the amount of sublease space on the market due to continued corporate consolidations, will likely contribute to a further increase in the Midtown vacancy rate in the near term.
Downtown continues to be negatively impacted by firms relocating their front office space to Midtown and their back office space to the outer boroughs, New Jersey and other locations around the country. As of the first quarter of 1190, the primary vacancy rate was approximately 16 percent, which can be expected to increase due to banking sector consolidation. Development activity in Downtown has virtually halted.
The few large tenants in the market for office space in Manhattan are either relocating in order to take advantage of competitive rental rates or are consolidating their operations into one location. In general, demand for office space in the near term is expected to be significantly lower than in recent years, due to the continued consolidation of commercial banking firms and the economic recession, which is contributing to a contraction in the services sector. Other factors that may continue to negatively impact demand for Manhattan office space include: relocations to the outer boroughs, suburbs or other parts of the country; quality of life issues; and rising real estate taxes.
Average gross asking rental rates for primary office space in Midtown continued to decline through the first quarter of 1992, from $40 per square foot as of January 1991 to $36 per square foot as of March 1992. Average gross asking rental rates for primary office space in Downtown remained relatively flat from January 1991 through March 1992 at approximately $32 per square foot. Effective rental rates continued to decrease, as landlords offered more attractive concessions packages in order to induce tenants to lease space.
The national and local economic decline during 1991 and uncertainty about New York City's economy have negatively impacted the retail sector. In general, retail sales in 1991 in New York City were flat. The retail vacancy rate has steadily risen to nearly 11 percent as average asking rental rates declined more than 12 percent. As rental rates have declined and landlord concessions have increased, many retail chains that still perceive Manhattan as an attractive and profitable retail market are debuting or expanding. Nationally prominent retailers such as The Gap, Merry-Go-Round, Ann Taylor, HMV, Staples, Williams-Sonoma and Eddie Bauer made commitments to several locations throughout Manhattan during 1991.
Recent bankruptcy filing on the part of department store chains has had an impact on the New York retail market. R.H. Macy & Co., the parent company of the nationally prominent department store chain in Macy's, filed for bankruptcy protection in January 1992. R.H. Macy has announced selective store closings and other measures to reduce expenses which should ultimately results in a more financially-stable company. Macy's is New York's largest department store. Alexander's Inc., a major New York City retailer, filed for bankruptcy protection in May 1992. Alexander's a budget department store chain, operates 11 stores in the New York metropolitan area and has recently announced that all stores will be closed. It is anticipated that Alexander's will sell much of its real estate, which is believed to have considerable value.
In spite of the overall downturn, conditions in the "luxury market" including space along Fifth Avenue, Madison Avenue and 57th Street - experienced some improvement commencing in the second quarter of 1991. Luxury rental rates range between $250 and $500 per square foot, and may be even higher in certain locations.
The 1.8 million square feet of office space recently completed in Midtown has further exacerbated the existing state of oversupply in the market, which can be expected to worsen with the projected delivery of 306,000 square feet in 1993. Beyond 1993, however, many proposed projects will not be completed as originally planned due to the lack of tenant demand and the difficulty in obtaining construction financing.
Negative net absorption is likely to occur in 1992 as companies continue to reduce their office space needs due to consolidation within Manhattan and relocation of some operations to sites outside of Manhattan. A further softening in the market is anticipated through 1993 as marker supply continues to outpace demand, which should cause an increase in vacancy rates in the short term. While demand is expected to return to the market by 1994, absorption during the remainder of the decade is likely to be meaningfully below the six-year (1985-1990) historical average of 3.5 million square feet per annum.
The significant amount of new construction recently completed in Manhattan combined with increasing vacancy rates has placed downward pressure on effective rental rates. As vacancy rates are expected to increase through 1993, effective rental rates are expected to further diminish. If net absorption levels beyond 1993 reach historical levels, which is unlikely in our opinion, effective rental rate growth would not be achieved until at least the year 2000.
Although effective rental rate growth for the market as a whole is not projected until at least the year 2000, certain segments of the market should recover earlier than other. In particular, Midtown should experience effective rental growth earlier than Downtown due to its more diverse tenant base and because increased demand for office space should initially come from service firms, which are more concentrated in Midtown than Downtown. Finally, the continued consolidation of the commercial banking sector should impact Downtown more severely than Midtown.
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|Title Annotation:||Review and Forecast, Section V; New York, New York economy|
|Publication:||Real Estate Weekly|
|Date:||Jun 24, 1992|
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