Negative Net Absorption is Red Flag for New York City Real Estate

Despite deep turmoil in the financial markets, the New York City commercial real estate market was generally considered to have held steady in the first quarter of 2008.  But that has now changed. Vacancy rates nudged higher, to 5.7%, in the second quarter of 2008.  While rents were largely unchanged, the real red flag in the market is net absorption. The negative net absorption of 1.44 million square feet recorded in the second quarter of 2008 is almost double the negative net absorption registered in the first quarter. And much of it occurred in Midtown, which had been enjoying extremely tight conditions.

While these numbers indicate the beginning of a downward trend, the heaviest cloud hanging over the market may be the coming sublease space that has not yet hit the market. Midtown alone could see 750,000 SF put back on the market by Pfizer, 400,000 SF by Lehman Brothers, 500,000 SF by Bank of America and several hundred thousand square feet by JP Morgan Chase.  Others, like Citigroup, have space being offered "unofficially."

Given that the financial services industry is the primary engine of the Manhattan office market, this contraction will have a ripple effect on most business sectors that rely on the financial services industry. Ultimately, there will be downward pressure on rents as landlords face reduced demand and increasing competition from the sublease space.

More details and market statistics are available in NAI Global's Q2 2008 New York City Market Report, which can be downloaded at www.nainyc.com.