Space is Tight, Office Market Robust

New York Times Real Estate

Sunday, September 20, 1998

Space is Tight, Office Market Robust

By John Holusha

Ruth Colp-Haber, a partner in Wharton Property Advisors, Inc., which also represents tenants, said that because of the tight market "landlords are making demands at the last minute, upping rents and taking away space." High rentals and the shortage of space "represent a significant impediment to small business growth in New York City", Ms. Colp-Haber added. "This is the downside of an otherwise vibrant economy and booming real estate market. In sum: things are so good, they’re bad".

With vacancy rates declining, rents rising and some tenants opting to move either to the suburbs or to parts of Manhattan that were once avoided, the fundamentals of the commercial real estate market in the New York area have been robust in the first nine months of the year.

According to preliminary third quarter figures compiled by the Julien J. Studley company, the overall vacancy rate for office space in Manhattan fell to 5.8 percent, from 6.8 percent in the second quarter, while average rents rose to $31.29 a square foot annually, from $28.97 a foot.

But REIT’s lag, and financing is affected by stock market dips.

Lost in these averages is the fact that in some parts of midtown, such as the area near Grand Central Terminal, space in the newest and best buildings is all but unavailable, and asking rents of $70 a square foot have been reported.

The vitality of the office market has also been reflected in the retail sector, with some stretches of Madison and Fifth Avenues commanding annual rents of $300 to $500 a square foot. Hotels are filled nearly to practical capacity, with room-rate increases fattening owners’ profits.

But the gyrations of the stock market are having an impact on sales of property, with the decline in the price of real estate investment trust stocks removing them, at least temporarily, from the acquisition scene and forcing other financing sources to reevaluate their plans.

"The sentiment is different," said Peter Hauspurg, the chairman of Eastern Consolidated Properties, which specializes in building sales, "and we’re trying to sort out what it means." He said financing sources were now requiring developers to supply a higher proportion of funding for deals. "Wall Street and the hedge funds pulled back from financing in the 80 to 90 percent range," Mr. Hausgurg said.

Mr. Hauspurg said the new reluctance of investment firms to aggressively finance purchases was likely to slow the pace of transactions as buyers and sellers are forced to negotiate new terms. "This is not great for the sales business," he said. "When the price changes, the volume drops 80 percent."

"There were a number of players," said Sean F. Hennessey, director of the New York hospitality practice for Pricewaterhouse Coopers, the accounting and consulting firm, "who were going to put properties on the market who have pulled back".