Reuters - Bear fire sale rattles Manhattan office market

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Bear fire sale rattles Manhattan office market

Tuesday, Mar 25, 2008 8:0PM UTC

By Ilaina Jonas - Analysis

NEW YORK (Reuters) - The Manhattan office market can withstand the fire sale of Bear Stearns Cos Inc, but if other financial firms disintegrate, flat rents and lower values already expected could turn into a sharp decline.

"The real test is how big are the ripples from this and how far are they going to extend," John Houck, senior managing director of Weiser Realty Advisors LLC, said.

"I feel a little like we're tipping at the edge of the roller coaster," he said. "For the moment, I hope it will be just a small ride down and it will tip back up again."

Last week, Bear Stearns nearly collapsed under the weight of the credit crisis. JPMorgan Chase & Co has agreed to buy the firm, on Monday ratcheting up its initial offer to $2.1 billion from $236 million.

While JPMorgan said it intends to hire some Bear employees, Peter Hennessy, president of tenant representation brokerage firm Staubach Co's New York office, estimated that about half the 14,000 jobs at Bear would disappear, sharply reducing office space needs.

The health of the Manhattan office market rests on the financial sector, which occupies about 35.6 percent of the roughly 391 million square feet of New York office space, according to real estate brokerage Cushman & Wakefield.

At the end of February, Manhattan's vacancy rate stood at 5.8 percent in Manhattan and 6.1 for high quality Midtown buildings that financial tenants prefer, according to Cushman & Wakefield. The average asking rent for a Class A midtown building was $84.65 per square foot.

"If 2 million or 3 million square feet hits the market, it adds a point or two points to the vacancy rate," Hennessy said. "We could end up at even 8 or 9 percent. That's kind of equilibrium -- a good balance between supply and demand."

Houck and Hennessy said they expect rental rates to be flat. Effective rents -- the rent after sweeteners -- could decline as much as 5 percent, Hennessy said. "This 5 percent could turn into 10 percent if the momentum builds."

If Bear's meltdown becomes the first in a series of collapses, some experts said the market could be badly battered, leading to a surge in the vacancy rate.

JOB CUTS

New York-based commercial finance company CIT Group Inc is struggling not to follow Bear's path, and Citigroup Inc is cutting about 2,000 more investment banking jobs on top of the 4,200 cuts announced in January. Fewer workers reduce the demand for office space, weakening market rent and ultimately prices.

New York City's Independent Budget Office said on Monday the city risks losing more than 20,000 financial sector jobs over the next two years, and that's before the effect of Bear Stearns.

Recently, many financial tenants have considered putting space back on the market through subleasing. But they have been reluctant to give up space, fearing they would be forced to pay even more should the credit markets recover.

Bear Stearns' situation may be starting to change that, Hennessy said.

Included in the deal with JPMorgan is the 1.1 million square-foot Bear Stearns World Headquarters at 383 Madison Ave. The agreement gives JPMorgan the right to purchase the building for $1.1 billion, less any debt the building carries, even if the deal falls apart.

JPMorgan intends to move its investment bankers from its building across the street, and still plans to construct another building at No. 5 World Trade Center, Spokesman Joe Evangelisti said.

JPMorgan occupies 5.63 million square feet throughout Manhattan, according to real estate brokerage firm CB Richard Ellis Group Inc. Bear Stearns occupies 1.61 million square feet in Manhattan.

"Now you got others saying we probably need to start unloading," Hennessy said. "That effectively is the first piece of the dam to break, meaning that while others had been playing with it, nobody pushed forward with it."

Until the turbulence settles and the rental market becomes more measurable, Hennessy is advising his clients not to make any deals unless their lease is expiring within the next nine months.

"Most people want to know that they're either close to the bottom or at the bottom before they make a decision like that," he said.

(Additional reporting by Joan Gralla; Editing by Brian Moss)