Current Long Island Office Market Conditions and Forecast
The underpinning for a 2010 recovery in Long Island's office market is fragile... at best. Whereas the "down cycle" for commercial real estate took root during early 2009, we do not expect any material recovery until the Island's fundamentals i.e., white collar employment, recovers. It is sobering to reflect on the disappearance of 50,000 LI jobs since December 2007. Until we see a rebound in job creation, especially white collar jobs, LI's office market is in for a long slog.
If you happen to be a tenant the good news is... the office market is unequivocally tenant friendly. Not so good if you are a landlord. Over the last 2 years, LI office rents have tumbled nearly 5.5%, despite run-ups in key operating expenses especially property taxes and utilities. Coupling this with increased vacancy rates, landlord profit margins are very thin. If a tenant is willing to take space with little or no reconfiguration of existing partitioning, thereby minimizing work letters, landlords are reciprocating with very favorable terms and conditions.
Insofar as recent market conditions, Nassau and Suffolk class-A office space have taken the biggest hits. Over the last 2 years Nassau has seen vacancy rates increase by more than 7% whereas Suffolk's class-A office space has experienced 29% increase in vacancies...attributable to several new office buildings coming on line along with a substantial amount of office space having been vacated by mortgage companies.
What this all portends is, for the first time in nearly 26 years, the traditional "up the ladder" progression from class-B & C office space to class-A office space is reversing. Also, and perhaps more importantly, the migration of office tenants from west to east has picked up. In other words, companies having been comfortably ensconsed in class-A Nassau County office space are now seeking ways to reduce their overhead and are considering class-B space and/or looking for locations in Suffolk County, especially Melville.
Absorption
Over the last 12 months, net office space absorption has been approximately -41,000 square feet. Unfortunately, we are not comfortable with this statistic because we believe the negative absorpiton has been greater because some landlords, believing a full accounting would undermine their negotiating position, may be under-reporting their vacant space. As a result, a sizable amount of "ghost" space is floating in the market. Some landlords reporting their vacant space within a range rather than specific suite availabilities. For example, a landlord may list their availabe space as being "from 2,500 to 12,000." As a result, the accumulated amount of vacant space, if reported suite by vacant suite, might be much more than the high end of the range.
Forecast
When looking at the past to glimpse into the future, at least one of the "old" pattern remains the same..."as goes Manhattan, so goes Long Island." In other words, until the Manhattan office market recovers, LI will remain in the duldrums.
Any "flight to the suburbs" is no longer limited to LI. Not only have other suburban office markets matured, but LI's "draw" is less prominant. Specifically, the "spread" between LI and Manhattan rental rates has materially narrowed. Also, with the region's unemployment remaining at worrisome levels, LI workers are less reluctant to travel to Manhattan or the outer boroughs. If LI is to experience positive office space absorption, it must be produced from within.
Fortunately, unlike the prior real estate down turns, there is very little new construction in LI's pipeline. As a result, the "good news" is that our problem is and will remain solely a lack of demand, not an overhang of new construction. Once demand begins to pick up, the office market may not have to climb as steep a wall. Accordingly, we are expecting a gradual "U" shape recovery for Long Island's office market. Since we are perhaps no further than one-quarter through the trough, that's bad news for landlords, but very good news for prospective tenants.
