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Wall Street is awash in sublease space, a bad sign for landlords

June 13, 2018

Sub leases make up 1.7 per cent of vacancies in office buildings in midtown Manhattan. Photo: Daniel Acker/Bloomberg

David M. Levitt

When the Murdoch media empire abandoned plans to move from midtown Manhattan to the World Trade Centre two years ago, developer Larry Silverstein put on a brave face. “Make no mistake,” he said. “Downtown’s momentum is palpable and unstoppable.”

We’re about to find out.

As companies realise they need less office space than they leased, they’re dumping more than 600,000 square feet (55,000 square metres) of subleases downtown, competing with their own landlords and threatening to undercut rents.

“Sublet space is usually priced at a discount to direct space” offered by landlords, said Craig Caggiano, executive director for the New York tri-state region at Colliers International Group. “If sublet space stays on the market, or even more sublet space comes on the market, that could exert a downward pressure on prices.”

When Silverstein declared downtown unstoppable, Conde Nast had relocated to 1 World Trade Centre, and brokers from CBRE Group, which represented the Murdoch companies in talks with him, had just said their move would confirm lower Manhattan as a mecca for media tenants. Now, Conde Nast is giving up 376,000 of its more than 1 million square feet at 1 World Trade.

On top of that, Liberty Mutual Insurance is looking for takers for 130,000 square feet at 55 Water Street, a 3.5 million-square-foot behemoth by the East River, and the Port Authority of New York and New Jersey is marketing two floors at its headquarters in Silverstein’s 4 World Trade Centre. Port Authority spokesman Steve Coleman said officials “identified space efficiencies in the tower and are taking advantage of it.”

All told, downtown subleases made up 2.3 per cent of the market’s 105 million square feet at the end of May, according to Franklin Wallach, managing director for tri-state commercial property data for Colliers. Other than April’s 2.4 per cent, that’s the highest level since 2010, when the city’s financially driven economy was struggling to recover from the 2008 crisis.

Two supertall skyscrapers, 157 W. 57th St, right, and 432 Park Ave, left, are seen from Central Park in Manhattan, New York, Thursday, Feb. 18, 2016. The last few years have seen the rise of the supertall, a building standing more than 300 meters high. New technologies have allowed the buildings to have footprints no more than the width of a brownstone or two, a far cry from the massive city block an older building like the Empire State Building requires. (AP Photo/Seth Wenig) Agents say the rise in sublease space in Manhattan is an opportunity for tenants. Photo: Seth Wenig/AP

And more supply is on the way. Silverstein is cutting the ribbon this week on 3 World Trade Centre, a 2.5 million-square-foot skyscraper that will open about 40 per cent rented, ahead of his 2 World Trade Centre, which is slated to add 2.8 million square feet to the market when it’s built.

With 14.3 million square feet of office inventory under construction in Manhattan, “it’s hard to think there won’t be winners and losers as these buildings pull tenants away from older space,” said Lauren Baker, an analyst with CoStar Group, which monitors office leasing nationwide.

Subleases in the New York metropolitan area now make up more than 1.5 per cent of the market, the highest since 2010, CoStar data show. According to Colliers, both Midtown and Midtown South – the area roughly between Bryant Park and Canal Street, which has been popular with technology and media tenants – are at 1.7 per cent.

That’s going to make life harder for landlords, with the average Manhattan office rent at the end of May a shade over $US74 a square foot ($97), only half a per cent more than a year ago. Spending by landlords on free rent periods, finishing out space and the like to retain and attract tenants is already close to a post-recession high, raising the cost of filling offices.

On the tenant side of the equation, the jump in sublease inventory downtown “could present opportunities for companies looking for less expensive space options, especially for well-built space,” said Caggiano of Colliers, adding that subleases “can eventually exert downward pressure on asking rents overall if the sublet space is not leased or removed from the market”.

The rise in subleasing means more companies will have a chance to enter the downtown office market at a price that makes sense for them, said Jeremy Moss, executive vice president for leasing at Silverstein Properties. “If anything, this is a great opportunity for a tenant,” he said.

Wallach noted the district’s attractions to corporate tenants, including robust new transportation options and a livelier environment. “Downtown is different from the last time sublet availability was this high. The residential population continues to grow, there’s more hotels, there’s more of a live-work-play environment,” he said.

The demand is evident. Leasing in Manhattan last month totalled 4.2 million square feet, almost 83 per cent higher than in May of last year and consistent with growth since the beginning of 2017. Downtown accounted for about 1 million square feet of that, more than double the figure from a year earlier.

Brokers and landlords are hoping the wave of subleases will mostly end up the way Bank of New York Mellon’s did in March. J. Crew Group agreed to take the bank’s entire 350,000-square-foot headquarters at Brookfield Place when the lender decided to consolidate in its offices at 101 Barclay Street. That averted a headache for downtown’s largest landlord, Brookfield Property Partners LP, which controls the 8.4 million-square-foot complex.

“It’s not 2009 again,” Caggiano said, noting that the economy is strong. “The subleases are not primarily the result of relocations out of downtown, and we have seen continued migration to downtown from Midtown and Midtown South.”

Lower Manhattan is no different than the rest of Manhattan, said Jessica Lappin, president of the Alliance for Downtown New York, a group of lower Manhattan businesses that provides security, sanitation and special-events programming for the area. On the whole, she said, “it definitely seems like it’s a scrappier market. I think people have to hustle a little bit more to make deals.”

Silverstein’s Moss said that “everyone is going to succeed as long as New York City is growing. This is not a war.”

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