Traditionally, when it comes to reading behind the manipulated media's tea leaf rhetoric and timing major inflection points in the economy, the most accurate predictor are financial firms, whose sense of true economic upside (or downside) while never infallible, is still better than most. Yet unlike employment, which is usually a lagging, or at best concurrent indicator, one aspect that has always been a tried and true leading indicator, has been real estate demand, in this case rental contracts. Due to the long-term lock up nature of commercial real estate contracts, firms are far less eager to engage in rental transactions (and bidding wars) when they expect a worsening macroeconomic environment. Which is why news that office vacancy in Manhattan's Plaza district, the area between Sixth Avenue and the East River from 47th to 65th streets, anchored by the landmark Plaza Hotel at Fifth Avenue and Central Park South which is home to some of the nation’s most expensive and prestigious office towers, and where America's largest hedge funds and PE firms have their headquarters, has just risen to 12.3%, or a two year high, is probably the most troubling news for the economy and a real indicator of what to expect of the immediate future.
The availability rate for offices in the Plaza submarket reached 12.3 percent last month, a two-year high, as space leased to Citigroup Inc. and General Motors Co. went on the market, according to data from brokerage Colliers International. It was 10.5 percent in the third quarter of last year.
If there is any indicator of financial firm demand for property, and thus their outlook on future prosperity, it is the state of the Plaza real estate market:
About 30 percent of the market is financial-service firms, which have announced about 60,000 job cuts worldwide this year, according to data compiled by Bloomberg.
“The Plaza’s weakness is symptomatic of a larger problem,” said Michael Knott, a real estate investment trust analyst with Green Street Advisors Inc. in Newport Beach, California. “Manhattan’s economic engine is not firing, and that, of course, is finance.”
Office owners in the Plaza district have historically sought higher rents than in the rest of Midtown, even if it means leaving space unleased for longer. Asking rents averaged $80.74 a square foot at the end of August, the highest in midtown Manhattan, where the average is $71.28, according to Colliers. Midtown Manhattan rents are the most expensive of all U.S. business districts.
The Plaza area is so pricey because securities firms, hedge funds and money-management companies want to be near one another in New York’s top buildings, said Joseph Harbert, president of Colliers’ eastern region. The park, hotel and the Fifth Avenue and 57th Street shopping corridors are draws, as well as the idea that “it is close enough to transportation but not in the midst of all the congestion of Grand Central” Terminal, Harbert said in an e-mail.
Needless to say, the primary driver of the surge of vacancy, is ongoing corporate downsizing coupled with collapsing tenant cash flows.
Those are GM’s last offices in the building, said Laura Toole, a company spokeswoman. The staff of about 200 has been relocated to smaller offices at 1345 Avenue of the Americas, she said.
The GM Building offices “were sized for about 500 people,” Toole said. “So we’re going to a smaller, right-sized space, which in the end we hope will result in a significant savings for the company.”
“We’re still seeing a lot of interest from smaller financial-service firms,” he said. “It’s not a growth industry for the large financial firms today.”
Kozel said he expects the Plaza district’s availability rate to tick higher in the coming months as financial firms continue to reduce staff, citing Deutsche Bank as an example. The Frankfurt-based company said on Sept. 11 that job cuts will exceed the 1,900 it announced in July, and it will reduce regional back-office functions.
“The Plaza district will come back again,” said Hennessy of Cassidy Turley. “This may be somewhat of an aberration in the marketplace. How often is the Plaza the weakest market in Midtown? We need some stability both in Europe and in the United States, and we need some certainty about what our tax environment is going to look like going in post-2013.”
The reason why landlord REITs and other entities can keep rents as high as they want even as vacancy rates soar is that the funding cost in a ZIRP environment is virtually nil.
Some of the biggest U.S. REITs own or have stakes in real estate in the district, including Boston Properties Inc. (BXP), which controls the GM Building and 601 Lexington. At the GM Building, the Detroit-based automaker’s asset-management unit is leaving 114,000 square feet, which it has put on the market as a sublease. That is one of the Plaza district’s largest new vacancies, according to Kozel of Colliers.
Office owners are still getting top dollar in the Plaza district. The spread this year between rents landlords achieved there and those in Midtown overall is 17.2 percent, the highest in records dating to 2002, according to CompStak Inc., a New York-based leasing data service.
Rents tend to take awhile to adjust to higher vacancies, Harbert said.
Of course, under ZIRP, it will take much, much longer, before a true clearing market manifests itself. As a result, there is little opportunity cost to keep space unoccupied as there is little required cash outflows. It also means that many skyscrapers in what was once NY's most desired area, are now half empty.
“Right now, Midtown just isn’t cool,” Jason Pizer, president of Trinity Real Estate, a landlord in the area, said last week at a forum sponsored by Bisnow Media, a publisher of online business newsletters. “The people who come to our buildings, they use words like ‘dude’ and ‘totally.’ They pound you, they don’t shake your hand. And right now, those are the ones making the space decisions.”
In the Plaza district, about 234,000 square feet leased to Citigroup at 666 Fifth Ave. went on the market in August. That building, a 41-story skyscraper at West 53rd Street, has almost 500,000 of its 1.5 million square feet available, according to Cassidy Turley, a St. Louis-based commercial-property brokerage with offices in New York.
The tower housed Citigroup’s private-banking operation, which has relocated to the bank’s offices at 601 Lexington Ave., the skyscraper formerly known as Citigroup Center, which is part of the Plaza District.
Vornado Realty Trust (VNO), which co-owns 666 Fifth with Kushner Cos., declined to comment, said Wendi Kopsick, a spokeswoman. The New York-based REIT is overseeing the search for new tenants.
The building in question is 666 Fifth. This is ironic, because it is the same building we discussed years ago, and was captured in one of our first posts, when we began our narrative of the Second Great Depression. Nearly four years ago we said:
Looks like the commercial mortgage apocalypse is about to claim its next victim, this time in the form of the appropriately numbered 666 Fifth Avenue building, home to such previously flourishing tenants as Citi Private Wealth Management. Now that private wealth is no more, Citi has decided to take a hike and has so far vacated over 80,000 square feet of space (and since it has over 482,000 sq feet in the building, one can bet it has a ways to go). As a result, the building's DSCR (or ratio of rent generated to interest owed for us non mortgage bankers) has fallen to an abysmal 0.69. Even when taking into account the $98 million (or much less) reserve fund the building has set aside to cover rent shortfalls, one can assume it won't be long before the 666 insignia again prominently graces the roof, especially since it would have to replace a laughable Citi sign.
Sure enough, in the end we were once again proven right. And had it not been for the now ubiquitous manipulation of every market by the Federal Reserve, this prediction would have been validated long ago. Yet while under the New Normal one can dilute cash infinitely, one can never print actual cash flows, economic growth, and true wealth. It is the last three, or rather their absence, that is once again starting to become felt by everyone, and certainly the critical, and most "marginal", sector of the economy.