Manhattan Running Out of Office Space

I read this and thought, "Oh, damn!" This can be good news and bad news. On one hand, landlords can and probably will get higher prices in the short run. The danger in the long term is that businesses might not just leave Manhattan but leave New York City as a whole (especially in favor of Jersey City), deflating the market. At the same time, it presents opportunities for real estate firms to develop office space to meet growing demand.

A similar article appears in Commercial Property News where they mention that "You cannot get rents that support new construction anywhere except Midtown." This is a big problem. Investors need to make a return.

This will sound a bit sinister to some, but it would help a great deal if the construction industry unions could loosen up so as to allow more and cheaper construction and enable the development of the outer boroughs. I can easily imagine the hue and cry that will arise from workers groups that evil developers are trying to bust unions in order to build housing and office space for rich white people. A PR campaign will then have to be launched to convince people that if New York City is going to remain a vibrant place to live with the many opportunities and rich cultural life that we are used to, then development like this is necessary. That being said, as developers we must be sensitive to the impact our projects will have in surrounding communities.

Every day I ride into Manhattan on the express bus via the Bruckner Expressway. I look around me and I see a lot of unused capacity in the South Bronx and in Harlem. Buildings boarded up and not being used - I see this as money wasted. The shortage of office space as well as housing space could potentially be remedied by simply making these spaces useful. I'm sure it's more complicated than it looks. Maybe the owners don't want to sell. Maybe it is not clear who is the owner. There is guaranteed to be legal and political isues in connection to zoning and getting these communities to buy in to such development projects. In any event, it is this issue which I have observed that draws me into the commercial real estate industry. I see a lot of work to be done that it seems will be fun to do. Everyone I talk to says that commercial real estate is a great business and so it makes me excited to join the industry.

Imagine for a minute - a waterfront community consisting of residential space but also some office buildings - in the South Bronx. It could be awfully cool. It could be like what they have started doing in Long Island City. I will discuss this in more depth later in a separate post. But suffice it to say that I am not the only one with a new vision for the South Bronx. Vision like this is what real estate, especially development, is all about.
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Manhattan running out of office space: report by Julie Satow


Demand for Manhattan office space will outstrip the existing and projected supply in seven years, making development in Lower Manhattan and on the west side necessary, according to a report by CB Richard Ellis.

With office employment estimated to grow by 1.4% a year, the brokerage firm projects that vacancy rates will decline to below 5% by 2008 and to below 3% by 2009. This supply constraint will push up rents, with average asking rents reaching as high as $90 a square foot by 2010. The projections do not consider economic factors such as inflation and interest rates.

“With vacancy rates declining, rents increasing and few new construction projects on the horizon, our ability to keep pace with future business growth in the city is threatened,” said Mary Ann Tighe, the chief executive of CB Richard Ellis for the New York Tri-State region.

The brokerage said the office shortage makes development of the World Trade Center site and at the Hudson Yards on ManhattanÂ’s west side necessary. The Ground Zero project is bogged down by the rift between leaseholder Larry Silverstein and the Port Authority of New York and New Jersey, which owns the site. Commercial development on the west side awaits transportation improvements.

In Midtown, an average of 9.1 million square feet of office leases is expected to expire annually over the next 10 years, the report released Wednesday says. That means that about 500 tenants will face expiring leases and new rents that are as much as 60% higher than they currently pay. Tenants could be forced to leave New York to find cheaper office space.

The market “is strong, but that very strength could portend challenges to retaining its office employee base,” said Ms. Tighe.

While demand is expected to increase, office construction has fallen in the past six years. While an average of 4.2 million square feet was constructed every year since 1950, since 1990 that number has dropped to only 1.2 million square feet a year. The rising cost of construction materials and labor, as well as a dearth of construction sites in Midtown means the trend will continue, the report says.

Excluding the World Trade Center, there are only 8 sites in Manhattan large enough to allow as-of-right construction of a one-million-square-foot office building, according to CB Richard Ellis. Considering that some of those buildings will be residential and that only two are near transportation hubs -- the Farley Post Office and Penn Plaza -- and the number of developable plots is even scarcer, the report says.

©2006 Crain Communications Inc.