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Office market hits bottom, new signs of life.

Office market hits bottom, new signs of life

With the New York City economy showing the first signs of life in recent weeks, we can expect that the Manhattan office market will soon follow suit.

Some positive news about the city's economy has been reported in May and June. The stories include a Manpower, Inc. study showing that 12 percent of the companies surveyed expect to increase their work forces in the third quarter and the same percentage plan to cut employees. This compares to the previous quarter when only 9 percent said they would add workers and 26 percent planned cutbacks.

In addition, new housing starts and home resales have increased in the Northeast and the number of claims for unemployment insurance nationwide has dipped below 500,000 per week. While these numbers will not set any kind of economic expansion records, they are signs that the economy, both nationally and in New York, has reached bottom and is struggling to begin its recovery.

Similarly, there are some positive signs in the New York City office market. A recent internal study by the Edward S. Gordon Company shows that of the last 100 office space transactions we executed, more than half were for companies leasing more space than they previously occupied.

The supply of new office space will continue to be a crucial factor in New York's office market though the end of the year. The minimal amount of construction in progress -- only about 2.3 million square feet of space scheduled for completion through 1992 -- is beginning to have a positive effect on the market. In the Downtown market where no new product will come on line through next year, the availability rate has remained in the 19.5 percent range for the past year. In Midtown, where all the new construction is taking place, the 17.2 percent availability rate should be about as bad as it gets.

This lack of new supply eventually will translate into falling vacancy rates and increasing rental rates. Until now, the perception among many major tenants has been that rents will fall lower, and many delayed making major leasing commitments, when possible. That perception began to change in the first half of the year and will change even more rapidly in the second half.

Leasing activity in the first half of 1991 is down about 25 percent from the same period last year in the Midtown market. Downtown, the situation is even more pronounced with activity showing a decline of about 50 percent. This anemic leasing activity can be attributed to a conservative attitude among the city's businesses, but with the office market now at bottom, we should see an increase in leasing velocity as the year progresses. Several factors support this contention.

Among them, the gap in rents between Manhattan and suburban offices has narrowed significantly during the past couple of years and will stem the flow of businesses leaving the city in the future. Manhattan rents have dropped to levels where the savings on suburban space does not necessarily make a move worth the time, expense and inconvenience. In addition, with fewer firms laying off workers and talk of new hiring in financial services and other industries, the trend of declining space requirements will begin to reverse itself.

All the recent numbers and trends are enabling us to see the light at the end of the tunnel. For the immediate future, we will experience a continuation of the tenants market we've seen in the first half of the year. Competition to attract new tenants and preserve current tenant rosters will be fierce.

An example of the lengths to which landlords have gone in this market to attract solid tenants was vividly displayed in a recent transaction the Edward S. Gordon Company brokered at 125 West 55th Street. In order lure the tenant, Katz Communications, to the new building, the landlord bought out the remaining four years of the lease on their current office space.

Other savvy tenants are taking advantage of the opportunities today's market has to offer as well. Random House, the publishing giant, decided to remain at their current location and signed a lease for 350,000 square feet in a deal that even the largest of corporate space users only dreamed of five years.

As the economy continues its improvement, so will the New York City office market. Today, we are still in a tenant's market, but that too will change -- and maybe sooner than many industry observers expect. Even new office construction showed a dim glimmer of light recently with the announcement that work has begun on a 30-story office tower at 565 Fifth Avenue.

The bottom line is that any deal made during the next few months is bound to look extremely attractive five or ten years from now -- and the longer the term of the lease, the better the deal will look. With economic indicators pointing in their current direction, however, the opportunities in today's tenant market will not last for long.

John Powers Senior Managing Director Edward S. Gordon Company, Inc.
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Copyright 1991, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:Mid-Year Review & Forecast Section II
Author:Powers, John
Publication:Real Estate Weekly
Date:Jun 26, 1991
Previous Article:'Flight to quality' in NJ office market.
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