By TOM ACITELLI
Last February, Bloomberg L.P. signed a 400,000-square-foot lease at 120 Park Avenue. Wells Fargo had originally scouted the space, but Bloomberg offered a higher rent, making one of this year’s biggest office deals. It was a sign, commercial real estate brokers said, that the Manhattan office market was tilting in landlords’ favor again.
With tenants competing for space, it would not be too long before rents, tempered by the recession, would rise and incentives for tenants, a staple of the office market since the credit crisis of 2007, would recede significantly.
But that conventional wisdom has largely proved wrong. While Manhattan office rents have indeed risen since the recession and leasing activity has picked up, tenants can still command several months of free rent and allowances of many dollars a square foot in improvements to their space.
That is because, given the economic uncertainty at home and abroad, brokers say more tenants are deciding to sit tight rather than expand or move their offices.
Where tenants might have gotten perhaps 10 to 12 months of free rent upfront in 2009, they are now getting six to eight, commercial brokers said. Where landlords might have put up $65 to $70 a square foot in allowances for tenants to improve their spaces, they are now offering $55 to $60.
“It started to look like the tables were going to turn,” said Michael Cohen, the president for the tristate region for the real estate broker Colliers International and an owner of Class A and B office space in Manhattan. “What actually happened was we hit this newfound financial crisis. Instead of the tables turning, they hovered.”
For much of the last decade, Manhattan office rents seemed to only ascend, reaching well over $100 a square foot in some trophy properties, like the Bank of America Tower at 1 Bryant Park and the Seagram Building at 375 Park Avenue. Hefty incentives were largely unheard-of, as companies buoyed by the growing economy were expanding their offices or upgrading, and willing to pay top dollar to do so.
The average net effective rent — taking into consideration the tenant incentives that in varying degrees have long been part of the office market — was $69.48 a square foot in the first few months of 2008, according to research from the brokerage firm Cushman & Wakefield. By the end of that year, after the collapse of Lehman Brothers, it was $58.97. At the start of 2010, the net effective rent for Manhattan office space was $40.54, a drop of more than 42 percent from two years before. By the middle of 2011, it had edged up only about $7 a square foot.
And some tenants, suffering financially but still bound to a lease, put up space for sublease, further depressing rents. By early 2009, sublease space accounted for more than 27 percent of available office space in Manhattan.
“At the same time, we also had very large blocks of space, 100,000 square feet or greater,” said Mitchell Konsker, a vice chairman of the broker Jones Lang LaSalle. “Between both the softness in the sublease market during the recession and the large blocks of space, that put a lot of pressure on landlords to lower rents to be competitive.”
The economic tumult also meant more renewals and fewer new leases. Cushman & Wakefield’s research shows that 8.6 million of the 34.9 million square feet leased in 2010 came from renewals, the highest amount since at least 2004 (in 2005, for instance, renewals accounted for barely three million square feet of office leases).
“In the depths of the recession, what most tenants did was hide,” said Howard Fiddle, a vice chairman at CBRE Group Inc., “and there were very few relocations because tenants didn’t want to spend any capital at all and they didn’t want to make any long-term commitments.”
When leasing activity did pick up this year, it smacked into a fresh crop of bad economic news, including financial services layoffs in Manhattan and the debt crisis in Europe, not to mention ongoing high-stakes budget talks in Washington.
Landlords, according to brokers, will have to keep offering incentives to skittish tenants, however incrementally less generous than before. (Several prominent Manhattan office landlords declined to comment for this article, though they did not dispute that they were offering incentives greater than those offered before the recession.)
Brokers said recent deals with substantial incentives included the following:
¶ The Man Group, an investment management house, is taking a lease for 48,709 square feet for 10 years at 452 Fifth Avenue, set to close in the fourth quarter of 2011, at rents of $82 to $88 a square foot. But with at least 10 months of free rent and $75 a square foot for work on the space, the effective rent drops to $64.52.
¶ The banking giant UBS Financial Services leased 44,612 square feet for 10 years and eight months in 200 Park Avenue, in a deal that will also close in the fourth quarter. The rents there ranged from $70 to $75 a square foot. UBS received nine months of free rent and $60 a square foot for work on the space, clipping its effective rent to $56.99.
¶ The financial holding company Nomura Securities received $70 a square foot for work and 18 months’ free rent for its 897,000-square-foot, 20-year lease at Worldwide Plaza at 825 Eighth Avenue. Nomura’s rent effectively dropped to $38.42 to $42.69, from $46 to $63 a square foot.
Those incentives will continue, brokers said, until the Manhattan office vacancy rate reaches “equilibrium”— about 7 to 8 percent. Right now, the vacancy rate is around 9 percent, much higher than the 6 to 7 percent before the recession.
While New York’s commercial real estate market in the past might have lagged the overall economy by months, brokers said, the market now tends to react much more immediately, slowing or growing in a globalized environment. A debt crisis in Greece or a political debate in Florida can rattle an already jittery set of landlords and tenants dealing in the nation’s most expensive commercial real estate.
One potential stumbling block for New York is the possibility that financial services firms, now undergoing a rash of layoffs, will spill more sublease space onto the market. That could drive rents lower and incentives higher, as landlords of directly available space compete with the cheaper sublease space that is often already built out.
“I’m going to stick my neck out and say that I believe the current market conditions will persist for at least six months, and maybe as long as a year,” Mr. Cohen of Colliers International said. “But, as sure as the sun will rise, we will see tenant incentives return to shrinking — as I would have thought they’d be doing already.”
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