Thoughts of the Market - About Manhattan Commercial Real Estate Market

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Thoughs on the Market

Thoughts on the Market 2008

3.11.10

John (not real name) called me to ask about a 3000sf loft space he saw in my ad. After a phone conversation, we both felt that it was worth his visit. I met him and his partner Dottie the next afternoon. They loved everything about the space: attractive location, new wood floors, high ceilings, lots of light, full floor with private bathrooms and pantry.   Then I realized that the space is actually 3500sf. I got it confused with a 3000sf space next door that has very similar qualities.

It was a unfortunate but honest mistake. I have nothing to gain by showing a wrongly quoted size space to my client but reputation to lose. This was the first time I made such a mistake during my six years of working as a commercial real estate broker. I was embarrassed. I immediately and calmly told them about my mistake while we were still in the space. I apologized to them. I also suggested that I can show them the next door 3000sf. They looked at each other with a smirk and Dottie uttered "typical broker..." like I wasn't in the room. I became very quiet at that point. John tried to be polite and asked me to call him if I find a suitable space for them. I never called John again and I never will though I did come across something I know they would love and it was the right size.

As a broker, I service clients for financial rewards and emotional satisfaction that I did something good for people.  And I will not give up self-respect in the process.

10.11.09

We have been working with a client who is searching for ready to move in high-end space in a Class A building in Grand Central area.  During the process of the search, we came across a building which I found some data I would like to share:

Summer 2007, this building signed a 100,000sf lease with a new tenant for $125/sf.
Summer 2009, the same 100,000sf was on the market for sublease and accepted a deal at $75/sf with significant rent concession at the start of the sublease.

Such is the state of the market. The best bargain can be found at the high-end of the market: Class A buildings with large size space requirement.  This pattern is similar to the residential market in Manhattan: The high-end ($10M+) market has seen the largest price drop in transactions this year.  Studio and one bedroom apartments hold price better in general. In commercial leasing, space of 1000sf or less has the least percentage of rent reduction.

9.16.09 Summer 2009

The weather was not normal for summer 2009 in Manhattan to say the least.

According to one research report, there were 2.2 million square feet leased in Manhattan in July, up from 1.4 million in June.  From first hand experience and conversations with other deal makers in the Manhattan leasing market, most of the leases have been signed are for small to medium size spaces and for short term (less than 5 years).

That explains why the price for small spaces hasn't dropped as significantly as large chuck of available spaces. The price refers the overall package which includes rent concession and space improvement work done by building owners.

The office leasing market during the summer season was unexpected just like the weather: More activities than anticipated.  What does that mean for fall 2009? I really don't know. I will tell you my thoughts at the end of fall. Look, I am good at finding the best possible deal on the market now. I am not an expert in predicting what will happen to the price next month or next year.

6.11.09  Pricing Power

These days, I go on tours with my clients and observe this interesting phenomenon: On the same street and same block in two similar buildings of similar quality spaces, the price can differ by 30% or even 40%. What is going on?

Here are two factors contributing to such discrepancy in pricing:

- The uncertainty of the market. Some think the market won't recover until 2020 and some think it will recover later this year and they price their assets accordingly. Building owners and their agents think they are very smart people. They are usually not swayed by the opinions of potential tenants. If they think the market is going to bounce back quickly and hold their price high and therefore suffer high vacancy in their buildings, the only thing a potential tenant can do is to recognize the situation and stay away from such ownerships.

- Some spaces are overpriced because the ownership is controlled by the mortgage holder. The owner can't make a deal even if they want to.   Bargain hunter should not waste time negotiating with any of such owners.

I keep a list of buildings that I avoid as I always represent bargain hunters. (I have yet to meet a client who encourages me to offer market price -- everyone wants to pay "below" market.) But please don't ask me for such a list of buildings. I won't give it to you since this is part of my competitive advantage. And I don't feel like to expose anyone in the negative light. I do constantly updating the list because the growing vacancy rate in a building can humble a smart ownership quickly. And I observed such changes in recent weeks .  I enjoy watching this forever changing market.

5.21.09  Selection Criteria

I went on a tour with two lovely ladies to look for their next office space yesterday. We were scheduled to see 8 properties. In some buildings, we got the super to open the doors for us. In other buildings, we have building owner's agent to show us the space.

At the end of the tour, I check in with them to see which building/space best meet our requirements. The usual subjects of size, price, location and ceiling height came into discussion. Interestingly, they also mentioned one building agent was not very considerate to me, the tenant agent, during the discussion of a potential deal term in one of the buildings we visited. That's what I like about my clients in this city. They are smart: If the building ownership is not as kind as possible to me, the person who helps their asset to generate fresh revenue, that could be an indication of what to expect once you get into the building...

Most of the successful building owners I know have always been nice and kind to us.  Now you see, the building owners are smart, too :)

5.12.09  Distressed Commercial Real Estate

The distressed commercial real estate property means different things to different people: To some people, that just means one of the sad components of this recession we are in. To some shrewd investors, it means the seed of a huge money tree if they can get their hands on the "distressed" property at the right time with the right price...

What if you are a tenant in an office building and that building becomes "distressed"? If you pay your rent and other charges on time, most likely, you will continue to have the quiet enjoyment of your space for the duration of your current lease.  Your may ask your real estate lawyer to review your lease just to make sure. If your distressed building does get sold at a substantially discounted price later on, that means the new building owner probably can charge you less rent and still make a handsome profit from the building. However that does not mean the new owner will automatically renew your lease at a lower rate. It will require some professional negotiation.

The other question I get is: Why does it take that long to "workout"? It turns out most of the building owners bought the buildings with borrowed money from different sources: The regular mortgage (called "A-note"), the 2nd class mortgage (called "B-note"), and mezzanine loan which is not even classified as mortgage. When the valuation of the building goes down, the impact to different classes of lenders are different. There is friction between A-note holders and B-note holders.  There might be multiple mezzanine lenders for one building and they need to reach agreement with both A-note and B-note holders. Most of such negotiations require highly specialized lawyers and finance gurus. So the lenders and/or borrowers somehow need to borrow additional money to pay off these lawyers and consultants before they can reach any agreement about what they are going to do with the distressed building. But please have faith and patience. It will work out because it's in the best interest of all parties to work it out in the end.

During the mean time, just sit tight and make sure you are doing your part to pull this economy out of recession.

5.6.09 Big Space Market Vs. Small Space Market

The vacancy rate of Manhattan office building is high and climbing!  The average vacancy is 20%.  One of my clients Billy* who was looking for 1000sf with $4000 monthly rent budget thinks that he might be able to get 1000sf for $2000 now...

The average vacancy rate does not tell you the two-sided story: On one side, large companies are giving up large chuck of spaces especially in the Plaza District (50th -60th St, east of 5th Ave, west of Lexington Ave) where a typical Class A building commanded over $100/sf last year. And "large" here means 50,000 to over one million sf. It takes just a few large financial services firms, law firms or pharmaceutical firms to give up a few million sf of office space to make the vacancy rate shoot up very high in a very short period of time. On the other side, the vacancy rate for buildings with small spaces (500-5000sf) is also going up some but not anywhere near 20%.

I had an interesting conversation with a building manager Ted that manages a building with spaces ranging 200-2000sf.  The vacancy rate in that building is less than 5%. And the rent drop so far this year has been less than 5% while the average rent drop for Q1 in 2009 in New York City is 25%! Why? Ted reveals a little secret: All the down sizing companies are flocking to his building. There are not that many building like Ted's. That's why he can hold rent rate quite firm in a very soft market for building owners in the city.

Do you think Billy will get his 1000sf for $2000/month? He will if he goes to Brooklyn or NJ right now.

*Note: Names have been changed to protect identity.

4.29.09
I was on a tour with a designer client D earlier this week. We visited a few buildings and most of the spaces we saw are raw.   Yet, we spent on average 20 minutes in each of the space. Why did it take so long? A critical element of finding the right space is to visualize all the functional components of your business to fit into the new space. This visualization part can be outsourced to an architect. Or if you have good spacial sense and design skills, you can do it yourself.  The planning and visualization of a space can be fun!  A good broker also has the skills to envision a finished space with all specific tenant's requirements just by sizing up a raw space.

4.28.09
One of our tenants, a really nice person who I will just call her T here. T's business hasn't been doing well recently. And she has difficulty to meet the rent payment. What is the best thing T can do? That depends. But the worst is to stay in the space without paying the rent. I heard the excuse of the landlord not providing the heat or not fixing something supposed to be fixed, etc, so I am delaying the rent payment... It's not in the tenant's best interest to delay rent payment using any of the excuses.

It will be smart for T to consult with a tenant representative like us to handle such a situation with minimum negative impact to the financial interest and brand equity of the tenant. For a qualified tenant, we will provide the services for free.

4.24.09
Earlier this week we have a tenant who wants a 10-year lease and the building owner is only willing to give a 7-year lease term. Today another tenant of ours wants a 5-year lease in a different building, the ownership is only willing to sign a lease for 3 years. That's in direct contrast to the situation in pre-Lehman 2008 when the landlord favors a longer term lease of 5-15 years.  What it tells me is that: The building owners believe the current market rate is below long term average.

4.23.09
Chemistry counts: If there is chemistry between a building owner and a tenant or the energy of the building brings out the good feelings of a potential tenant, take note!