Economic Crisis Dims Manhattan Office Forecast

MBA (10/10/2008 ) Murray, Michael
Manhattan office vacancies could fluctuate negatively following Barclays Bank's acquisition of several Lehman Brothers business units, Bank of America's acquisition of Merrill Lynch, events at AIG and other economic issues.
In a New York office forecast report, Property and Portfolio Research, Boston, said Lehman's office space could remain occupied because of Barclay's acquisition. PPR reported that Lehman Brothers occupies nearly 3.4 million square feet of office space in the New York metro, including a one million square-foot building it owns at 745 Seventh Avenue, based on recent filings with the Securities and Exchange Commission.

"In the modified base case scenario, the addition of 3.4 million square feet of vacant space to the New York office market would exacerbate an already dismal demand picture for 2008, resulting in negative net absorption of 11.4 million square feet for the year," PPR said.

In an alternate “upside” scenario that assumes Lehman vacates only half of its office space [1.7 million square feet], PPR said vacancies could reach 12.4 percent in the third quarter. “In this case, the 'upside' would still result in a vacancy rate that is 220 basis points above year-ago levels, and rent projections would remain negative through 2009. But this scenario wouldn't count likely job losses in other financial firms and knock-on effects in the market."

Bank of America's acquisition of Merrill Lynch also leaves questions; PPR reported that New York "may again bear the brunt of any downsizing, and given that Merrill occupies nearly as much space [3.2 million square feet] in the metro as Lehman did, there could be much more pain on the way."

In a worst-case scenario of further economic troubles, PPR estimated job losses in financial activities at nearly 75,000—peak-to-trough—based on severe recessionary economic conditions, compared to nearly 40,000 cuts in the base case, or moderate recession, forecast.

"The health of the financial sector is highly correlated with the health of the overall New York economy, so heavy financial losses would carry through to other job sectors, bringing total metro unemployment close to 11 percent," PPR said. "These conditions would yield substantial negative net absorption—carrying into 2010—and a vacancy rate in the high teens, similar to levels reached in the early 1990s. Rent losses in this scenario would stretch on through 2011, with 2009 and 2010 as the worst years—contracting by 13 percent and 9 percent, respectively, and values would scale back by over 13 percent through 2009."