Wall St awash in sublease space, bad for landlords

New office space at the World Trade Centre is coming onstream at a time when subleasing is exerting downward pressure on rents
New office space at the World Trade Centre is coming onstream at a time when subleasing is exerting downward pressure on rents

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 are dumping more than 600,000 sq ft (55,741.2 sq m) 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.”

Second thoughts

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 a million sq ft at 1 World Trade.

On top of that, Liberty Mutual Insurance is looking for takers for 130,000 sq ft at 55 Water Street, a 3.5 million sq ft (325,160.6 sq m) 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 2.3pc of the market’s 105 million sq ft at the end of May, according to Franklin Wallach, managing director for tri-state commercial property data for Colliers. Other than April’s 2.4pc, that is the highest level since 2010, when the city’s financially driven economy was struggling to recover from the 2008 crisis.

And more supply is on the way. Silverstein was cutting the ribbon this week on 3 World Trade Centre, a 2.5 million sq ft (232,257.6 sq m) skyscraper that will open about 40pc rented, ahead of his 2 World Trade Centre, which is slated to add 2.8 million sq ft (260,128.5 sq m) to the market when it is built. With 14.3 million sq ft (1,328,513.5 sq m) 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 1.5pc 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 1.7pc.

Bargains for tenants

That’s going to make life harder for landlords, with the average Manhattan office rent at the end of May a shade over $74 (€62) a square foot, only 0.5pc 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 Mr 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. Mr 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.

Plenty of demand

The demand is evident. Leasing in Manhattan last month totaled 4.2 million sq ft (390,192.8 sq m), almost 83pc higher than in May of last year and consistent with growth since the beginning of 2017. Downtown accounted for about a million sq ft 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 Corp’s did in March. J Crew Group agreed to take the bank’s entire 350,000 sq ft (32,516.1 sq m) headquarters at Brookfield Place when the lender opted to consolidate in its offices at Barclay Street. That averted a headache for downtown’s largest landlord, Brookfield Property Partners, which controls the 8.4 million sq ft (780,385.5 sq m) complex.

“It’s not 2009 again,” Mr 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. Overall, 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 Mr 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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