Feb 23, 2010 - CRE News

Fundamentals for small-capitalization properties have continued to deteriorate, according to Boxwood Means Inc., with key metrics such as rents and tenant demand weakening last month.

National rents were down across the board in January when compared to a year ago. The declines range from 3.34% to $18.94/sf for medical-office buildings, to 8.23% to $7.17/sf for industrial properties. Office properties in general saw a 4.04% decline in rents to $17.57/sf, while retail properties have seen a 6.31% drop to $17.55/sf.

When compared to a month earlier, rent declines ranged from 0.2% for medical offices to 0.74% for industrial.

Boxwood Means is a Stamford, CT, research firm that focuses on small-cap properties, which it defines as those with less than 50,000 square feet. It compiles property-level operating and sales data through a partnership with LoopNet Inc.

It also compiles Days on Market, a calculation of how long it takes to rent vacant space that it uses as a gauge for tenant demand. It said the metric is at its highest level in nine months, meaning space is languishing on the market.

Despite the bad news in the data, Boxwood Means noted that declines in rents and demand are no longer as steep as they were in previous months. But it cautioned that fundamentals would continue to weaken until the national jobs picture improved and consumer confidence rose. Today, the Conference Board reported that consumer confidence had fallen sharply this month.

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With all of the available office space available throughout the country And the economy still in the dumpster, many business are looking towards subleasing as a way to save money on their office rent. In almost every case a tenant can save anywhere between 10% and 50% off the current market rents through a sublease. It sounds like a good deal and in many cases it is, but as in all investments the return (savings) is related to risk. Subleasing space is a risky proposition.  One in which it is very important to have a qualified expert assisting you to make sure you avoid costly mistakes or even worse, potentially cause your business to go under.

What are the risks?

First and foremost, what happens if the former tenant sub-landlord goes bankrupt? Most leases have a clause in them cancelling the lease or giving the landlord the right to cancel the lease if the tenant declares bankruptcy. If this happens and you do not have any protections, you will either be out on the street or paying higher rents.

What happens if you are paying rent to the former tenant sub-landlord, but they are not paying the landlord the full amount of the rent due? They are in default of the lease and therefore you are too.  What happens if the landlord decides to give them the boot? Will you be able to stay in the space at the same rate you are currently paying?  There is no guarantee that your sub-landlord will fulfill their obligation to pay the remainder of the rent or even the rent you pay to them to the landlord.

Although rare, hazardous waste can be another issue, especially if there is land involved. If your sub-landlord caused any hazardous waste, you could find yourself liable to clean it up. Cleaning up hazardous waste is not cheap.

There are ways to protect yourself when you are subleasing office space, but each sublease brings on different nuances that will need to be handled uniquely. A good real estate professional, such as the ones we have with OfficeFinder, will be able to mitigate the risks for you through a number of different means. The most important one would be a no-disturbance agreement signed by the Landlord and notarized. Not all landlords will agree to one, so other means of protection will need to be developed.

If you decide to sublease office space, make sure you protect yourself by partnering with a qualified real estate professional. You will be glad you did.

Jan. 12 (Bloomberg) -- Manhattan has 38 percent more office space for rent than a year ago as Wall Street job cuts and a weak economy reduced demand, Cushman & Wakefield Inc. said. The vacancy rate in the fourth quarter was unchanged from the third.

Available space totaled 43.8 million square feet at the end of 2009, compared with 31.8 million a year earlier, the New York-based brokerage said today in a report. That’s equivalent to 11.1 percent of Manhattan’s office space, the same as at the end of September, according to Cushman.

“We’re calling this close to the bottom,” said Joseph Harbert, Cushman’s chief operating officer for the New York region. “Rents will go down a bit from here, vacancies will go up a bit, but you won’t see any dramatic movements on either of those fronts in the next nine months.”

New York has lost about 40,000 financial services jobs in the past two years, according to the city’s Independent Budget Office. Earnings for the top 10 largest U.S. banks recovered in 2009 after the companies lost a total of $27 billion in the fourth quarter of 2008. Analysts estimate they will report a combined $3.84 billion profit for the fourth quarter of 2009.

In the second half of 2009, new leases were signed on 9.9 million square feet of space, compared with 6.4 million in the first half, according to Cushman. There were 10 leases for more than 100,000 square feet in the fourth quarter, twice the number from the same period of 2008.

Vacancy Rate

The office vacancy rate declined for two straight months after rising to 11.4 percent at the end of October, Cushman said. The rate was 8 percent at the end of 2008.

Asking rents in Manhattan averaged $55.52 a square foot at yearend, down 20 percent from December 2008.

Sublease space, or surplus offices marketed by tenants rather than landlords, rose to 10.6 million square feet from 8.2 million square feet at the end of 2008. It was down from a peak of 11.4 million at midyear. High sublease availability tends to depress rents because tenants have less incentive to seek top dollar for the space.

“The wholesale dumping of space is over, and has been over for some period of time,” Harbert said. “At some point we’re going to go back to recognizing we live in a space-constrained city.”

Midtown Rents

Asking rents in Midtown Manhattan fell 22.5 percent to an average of $61.82 a square foot, Cushman said. The vacancy rate was 12 percent, up from 8.5 percent a year ago and little changed from the third quarter.

So-called taking rents among Midtown Manhattan’s Class A buildings, the top-quality space, have fallen 42 percent to $52 a square foot since the first quarter of last year. They climbed from $50 a foot in the third quarter, the first sequential rise in at least two years. The increase may be another sign of the market bottoming, Harbert said.

Asking rents are the rents landlords advertise; taking rents are based on the terms of signed leases. They tend to be lower because they include concessions including contributions to interior construction costs and periods of free rent.

Lower Manhattan rents averaged $40.36 a foot, down 15.7 percent from a year earlier. Vacancy was 9.6 percent, down from 9.9 percent in the third quarter.

The area’s vacancy rate may rise to as high as 14 percent in the next 15 months, in part because of Goldman Sachs Group Inc.’s plan to move its headquarters to a new skyscraper in Battery Park City from 85 Broad St. and other downtown buildings, Harbert said.

In Midtown South, roughly the area between 34th and Canal streets, rents dropped 12.8 percent from a year earlier to $47.17 a foot. Vacancy was 10 percent, up from 7.1 percent a year earlier and 9.4 percent in the third quarter.

To contact the reporter on this story: David M. Levitt in New York at dlevitt@bloomberg.net

A Bloomberg news report says Silicon Valley has the biggest office space glut since the dot-com bust, leaving the U.S. technology hub with empty high-rises and office parks that make it impossible for landlords to sustain average rents.

More than 43 million square feet of office space stood vacant in the third quarter of last year -- that's the equivalent to 15 Empire State buildings and a vacancy rate over 21% for the silicon valley area.

Asking rents averaged $34.56 a square foot for Class A space in the third quarter, 21 percent less than a year earlier. The rate for flex space was $14.16 a square foot, down 16 percent, according to CB Richard Ellis.

Commercial property foreclosures will at least double in 2010 and job growth is not expected to return for two years after that, held back by U.S. consumers who are saving more and changing their spending habits.

Unemployment in the greater San Jose area was 11.8 percent in November.

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