New York City Tri-State Area: Early Signals of a Bottom?

Hedge funds, private equity funds and top-tier investment banks that inhabit or inhabited Midtown offices along the premier Avenues were the first companies in New York City to experience the tumult of the current recession. Of course, the declines in their respective businesses that began in the second quarter of 2008 were preceded by the burgeoning collapse of the residential housing market that began a year earlier in the rest of the country.

When New York City’s financial sector started to contract in 2008, demand for office space in the Midtown market shriveled. As a result, the availability rate escalated dramatically within key Midtown submarkets such as the Plaza and Rockefeller Center/Fifth Avenue districts

By the end of the first quarter of 2009, the office availability rate in Midtown was 13.3%; substantially higher than the availability rate in both Midtown South and Downtown, which ended the quarter with availability rates of 9.8% and 10.8% respectively. The financial sector is the lead horse that pulls the New York City economy, so the other major sub-markets in Manhattan were expected to follow the downward trend and show weakness in subsequent months.

This projection has in fact been borne out by the very preliminary numbers for the second quarter of 2009, which indicate that the degree of weakness among the major Manhattan markets is beginning to equalize. In the second quarter, for example, the overall Midtown availability rate likely increased to about 15%, or 1.7 percentage points higher than the end of the first quarter in 2009. Both the Downtown and Midtown South markets, however, will see substantially larger percentage gains. For Downtown, it probably jumped into the 12.5% area; and for Midtown South, the move was to 13%.

Manhattan’s office property market likely sustained further deterioration in the second quarter. But the more pressing concern centers on how long the decline will continue and how far it will drive availability rates up.

In recent weeks there have been some references to green shoots [meaning the beginnings of economic growth towards the end of a recession] when talking about the national economy’s incipient recovery. Virtually all of these instances were supported by observations that the rate of economic decline was slowing. The recent uptrend in the stock market, for the moment, confirms that upbeat assessment. While it is important to avoid getting caught up in overly optimistic scenarios based on a few positive developments, it’s important to note that our preliminary data for the Manhattan office market during the second quarter also shows some green shoots springing up among the rubble.

In May, the total amount of office space that was added to the total supply available for leasing did increase. But the total amount of space added during May was about 60% less than the amount added during each of the previous six months. The deluge of new space into the Midtown market slowed even more, with 70% less space hitting the market in May versus the preceding six months.

With net absorption of office space negative, the amount of available space continues to increase. But the pace of deterioration has slowed. All of this data indicates that Manhattan office market fundamentals are still weakening, but at a much slower pace. Again, one month of data does not prove a solid trend, but there is additional fundamental data that may lend credence to the property level statistics.

Again, based on the preliminary data, the employment situation in New York City does not seem to be weakening as fast as it was during late 2008 and early 2009. The year-over-year job loss in total employment is about 100,000, or 2.4%.
In the financial sector, employment levels seem to be holding steady, and the business fundamentals in that industry are improving. The unemployment rate for residents of New York City has been steady over the last few months, and the labor force number has continued to rise. These are additional positive signs.

While we have only a few indicators and observations from those measures of business activity, the incoming observations over the last month have turned more positive.

Dr. Peter P. Kozel,
Senior Managing Director,
FirstService Williams