New York City's Roller Coaster Ride
"It was the rise and fall of the likes of a Coney Island roller coaster," says Patrick Robinson, managing principal with Staubach Cos.' New York office, on the city's dot-com phenomenon. "I don't think I've ever seen an industry go full-cycle so fast."
In the first half of 2000, the dot-com industry was signing more leases than any other industry in the city with rental rates ramping up quickly for most property types. Class B rents, for instance, almost doubled in price in a short period of time.
 "The market was already pretty tight in the Class A space, but the New Economy really pushed it to a new boundary and brought the B- and C-quality buildings up to full occupancies," Robinson explains. "Then at the end of 2000 until now, that is already coming full-cycle. The dot-com sector of the New Economy is crashing and burning as we speak, and there is a huge amount of sublease space coming back on the market."
Dot-coms leased about 20 million sq. ft. (conversion) of the city's 400 million-sq.-ft. (conversion) market in the last few years, "and we anticipate that at least 50 percent of the dot-com space will come back to the market in the form of subleases or give-backs to landlords," says Peter Riguardi, managing director with Colliers ABR. "That will effect certain submarkets, be it on the West Side or parts of Tribeca and similar places."
Robinson says the space will predominantly come back online in downtown and other non-prime locations such as Midtown South, Chelsea, the West Side and Penn Station.
The economic slowdown has hit some Uptown firms. The sectors hardest hit on the revenue side are the consulting and advertising companies. As a result, these industries are pulling back from leasing space at this time. The dot-coms in Uptown, like their counterpoints in downtown, are rapidly returning space, mostly of C-quality, back to the market.
"The dot-coms that went to a more conventional neighborhood like Midtown, however, are finding a ready market for the space," says Alan Desino, senior managing director with Insignia/ESG's Midtown world headquarters office. "They may not be getting the price they were paying, but they're finding a buyer for their space."
What Does it Mean for Corporate Tenants?
Despite the fact that many firms are feeling the pressures of an increasingly weaker economy, the downturn has created new opportunities for space seekers. "Corporate tenants should be aware that the New York market plateaued in January," says Riguardi. 
During the current economic re-adjustment, diligent corporate tenants can take advantage of the many opportunities in New York's rapidly changing real estate market
"That means certain markets are going to roll back, and certain markets are going to roll back significantly. If the corporate real estate user can hold off on any real estate space decisions, the market might be more in his favor in a few months."
Rates are also dropping in some of the fringe areas that were redeveloped in the last real estate cycle. "These markets will see lease-backs of 25 percent to one-third in values," says Riguardi. "Some of the secondary locations will see 10 percent to 15 percent rollback in terms of value. However, the core area -- the Class A prime space in Midtown -- will only see a moderate change, only maybe 5 percent."
Midtown's pricing remains relatively stable because of the lack of available space, which keeps the market in check, especially with no speculative development taking place. Despite the fact that some space is coming back on line in Midtown, the entire Midtown Manhattan market on a comparative basis still sits at only 4.5 percent vacancy, according to Insignia/ESG -- well below equilibrium. Desino notes that equilibrium, which signifies equal negotiation strength for both landlords and tenants, usually occurs between 8 percent and 9 percent vacancy. So even at today's 4.5 percent, the landlords still have the upper hand in lease negotiations.
"However, if you look at trends, the 4.5 percent vacancy was at the end of January," Desino explains. "At the end of December, that 4.5 percent was more like 3.9 percent, so you're seeing a significant in-crease in availability in a very short time period."
That means a buyer of space has an excellent opportunity in the market. "Buyers can find space that was just improved less than a year ago that's ready to go," says Desino. "And some landlords, depending on the product, are actually looking to make transactions through the uncertainty of the marketplace."
In the downtown market, where the financial services, insurance and information technology industries have a stronghold on the market, there "has not been a reduction in rates yet," says Bruce Surry, executive managing director with Insignia/ESG's downtown New York office. "We have seen an improvement in business terms. Subleases are another picture entirely. Subleases provide a lot more flexibility, depending on the term, the degree of urgency and the anxiety of the people dumping the space."
The downtown turnaround is good news for those companies that are even more economically driven due to the recent slowdown. They can now consider downtown as opposed to staying in Midtown because there remains a dramatic price-value gap between Midtown and downtown.
Troubled tenants in downtown are also receiving some relief during the economic slowdown. "Many downtown landlords are involving themselves with the tenants' problems, taking control of the space and working out surrender agreements," says Surry. "The landlords see that they can be economically incentivized to do it, controlling their risk, especially after what economists have said that by the end of this year, we'll be back on track."
One Big Happy Office Market
Despite all the changes in the market, Manhattan still remains tight - so tight that many have looked to other markets for space, especially in Jersey City. Such major Manhattan tenants as Chase Manhattan, Goldman Sachs and Paine Webber have all turned to Jersey's Gold Coast for better rates and more space.
Some argue, however, that it is not as bad as it may look. "They're not moving out in total ... well, there are a couple, but very few are moving out in total," says Robinson. "The majority of what's going on is the huge space users in Manhattan like a Chase or a Paine Webber or some of the big insurance companies, they're looking at the market and saying, 'A large segment of our occupancy doesn't have to be in Manhattan. It can be in New Jersey, a subway ride or a ferry away.' If you're comparing Jersey City with Midtown Manhattan, it's half the occupancy costs."
As for in-state alternatives, the city of New York has begun to provide incentives for locating in other parts of the city as opposed to the Midtown and downtown markets. "The city wants to keep companies in New York, so we're having to expand our boundaries," says Desino. These incentives go to people willing to move or open operations in the five boroughs.
Spreading the New York market even further out, the Westchester County, N.Y., market was expected to be flooded with tenants because of the price of space in Manhattan. This has taken place to some degree, but not because of the pricing, says Dean Shapiro, executive director with Insignia/ESG's Westchester office. In reality, Manhattan's lack of available space has been the real draw for Westchester. "Manhattan has gotten to the point where there just isn't any space available," Shapiro explains. "New York has always proven itself to be extremely resilient, and what we've found is that instead of the air coming out of the balloon, so to speak, the balloon just got bigger."
But by some twist of fate, the economic downturn has actually turned out to be a godsend for the New York office market. "A year ago, there was virtually no availability," says Desino. "Some of these companies needing large blocks of space couldn't find it. Or at least it was much more difficult to put the deals together, and perhaps the suburbs were already put together. Now you don't have that situation. You have more opportunities for larger blocks of space being put together in Midtown. So from that standpoint, it's a great market for the tenant. On a relative basis, we have only 4.5 percent vacancy, but the market has changed in a positive direction for tenants."
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