Vacancy rates have plummeted for small to mid-sized office spaces in Manhattan’s bustling downtown creative neighborhoods. This has given landlords new power to negotiate tougher lease terms and forced tenants to change the way they look for space.
It is officially a landlord’s market. That means tenants are going to have to pay more or accept less than they would have just six months or a year ago. Many landlords are now rejecting would-be tenants they would have gladly embraced in 2005. More guarantees and larger security deposits are now commonplace.
The wholesale conversion of commercial and industrial buildings to residential use, especially in the last seven to 10 months, has made conditions even more dramatic. Residential developers have taken a significant amount of commercial space off the market. As a result, we’re seeing residential inventory build up and commercial inventory dry up.
The impact on commercial tenants has been dramatic. When the market was soft, most companies could choose from at least three competing spaces. Now, two of those spaces will be gone before they have the chance to make a decision.
Data from CoStar Group show that in Manhattan below 23rd Street, the availability of office spaces from 5,000 to 20,000 s/f in size has plummeted.
Vacancy rates dropped from 12.6% in the first quarter of 2002 to just 4.3% in the first quarter of 2006. In the last year alone they were slashed by almost half.
The shortage of appropriately sized office space has resulted in fewer lease signings as tenants scramble to find suitable places to house themselves, reversing the previous steady upwards trend. In 2005, 1,486,147 s/f of transactions were closed in the defined area, a drop of 10.1% from the 1,637,521 s/f that closed in 2004. Landlords have taken advantage of the scarcity by raising rental rates. Average rental rates in the defined area were up 27%, from $29.76 psf in the first quarter of 2003 to $37.84 in the same period this year.
The situation makes for some head turning price rises. One space that we leased at $32 psf in 2005 is back on the market for $42 psf.
One landlord on lower Fifth Avenue has been assembling an entire, vacant 18,000-square-foot floor. A year ago he would have asked for rent in the high $30s psf. Today he is asking $50 psf.
Statistics for the Manhattan market as a whole bear out the trends seen in the availability of small and mid-sized spaces. Vacancy overall has been dropping steadily since its peak in the first quarter of 2002.
In this tighter market, tenants should make as many decisions as they can ahead of the search process. First, they can establish space needs, based on an assessment of their clients, the marketplace, and the future goals of their business.
In seeking space, they should consider size, layout, facilities, location, reception setup, budget, and the image you want your business to project. When candidate spaces are located, tenants can simplify (and speed) the decision-making by analyzing prospective leases. This financial analysis must weigh rents, concessions, possession date and other factors on a single spreadsheet to be useful.
Tenants should then present a timely counter-offer to the prospective lease on your primary candidate property. During negotiations, they should review documents and proposals from the landlord quickly.
Why all the emphasis on speed? In this tight market, many landlords will have more than one offer under consideration at a time. Moving quickly can make the difference between a signed lease and a lot of wasted time and effort.
By Bruce Sinder, President