The New York financial services industry continues to be severely impacted as a result of the European debt crisis and turmoil in the financial markets. It is estimated that the industry could slash another 10,000 jobs by the end of next year according to a new report from the New York State Comptroller’s Office. Other estimates are higher. A recent New York Post article quoted that 10-15% of the entire Wall Street workforce may be eliminated.
Up till now, Wall Street has been the main driver in the office market resurgence. According to a recent report, financial services accounted for 32.4 percent of all leasing year-to-date, followed by information/media at 27.5 percent and government, education and social services at 9.5 percent. Financial services firms are the leading occupier of New York City office space. According to Costar’s third quarter 2011 report, the finance, insurance and real estate industries (FIRE) accounted for 28.4 percent of the total space occupied in the New York City office market.
Although, the employment base of the city is less dependent on financial services than in the past, the industry still comprises 12% of all New York City employment, which translates to roughly 316,200 jobs.
The question many landlords and office brokers, as well as users of space are asking, is whether the Wall Street downturn and loss of jobs will result in financial services firms putting their excess space on the market (sublet space), both increasing supply and leading ultimately perhaps, to rent reductions. Many users of space believe that rent reductions are imminent as a result of the Wall Street fallout. However, this may not be the case and making corporate real estate decisions based on Wall Street job cuts and an inevitable office market downturn might not be wise.
While there is little doubt that Wall Street will downsize, it is questionable whether the cutbacks will actually cause financial service firms to put their excess space on the market and whether this increased supply of excess space (sublet space) will lead to rent reductions. If a case can be made that the financial services firms will not glut the market with space and that demand for space by other industries will more than offset the increase in supply by the financial services firms, then a case can be made that the New York office market would not be impacted by job losses on Wall Street and could in fact, rise further.
Three years ago, with the United States in the middle of a financial crisis, major global banks looked to cut costs by subletting their unneeded office space to other companies. As the downturn dragged through 2009, the total amount of sublet space peaked, with Manhattan financial services firms listing at least 4.4 million square feet at the end of the year. Ultimately, the total amount of all industries’ sublet space peaked at 11.4 million square feet.
Today, the European debt crisis and resulting financial market turmoil has pushed banks again to cut costs. European banks have been most affected by the debt crisis and have recently announced a number of mass layoffs. Thus, it is expected that these banks will once again put their excess space on the market. In fact, some space has recently come on the market.
For example, Citadel Investments listed 30,529 square feet at 601 Lexington and Macquarie Holdings listed 50,000 square feet at 125 West 55th Street. Most recently, Societe Generale moved from 600,000 sf at 1221 Avenue of the Americas to 400,000 sf at 245 Park Avenue. The firm is now subleasing about 75,000 SF of that space. Also, it is likely that MF Global will sublet a large amount of its 64,525 sf of space at 717 Fifth Avenue as a result of its recent bankruptcy filing.
Despite these numbers, it is unlikely that financial services firms will come near to putting the 4.4 square feet of space that they did in 2009. Many of these banks have already reduced their footprints considerably over the past three years and may not be willing to put their excess space on the market in expectation of a market uptick and future hiring needs.
Many firms tend to hold onto excess space even as they lay off workers in expectation of improving business conditions. During the recent downturn a number of financial services firms put their space on the market only to take it back themselves. Thus, this recent lesson may lead these firms to hold onto a considerable amount of their excess space.
Assuming an aggressive job cut figure of 20,000 Wall Street employees and an average of about 200 sf per employee would amount to 4,000,000 sf of space. However, we believe that only about 25% of this, or roughly one million square feet will actually be put on the market.
While one million sf seems like a large amount of space, this is only a 26% increase in Class A sublet inventory space (3,847 million) and just 0.32% of the total Class A space on the market, which presently stands at 304 million sf and 0.19% of all space on the market, comprising 542 million square feet according to Co-Star.
This analysis however, does not take the demand side of the market into consideration. If there is an increase in demand for space which is greater than that of the supply coming onto the market due to Wall Street layoffs, then we would expect rents to rise.
Although financial services remain an important industry in New York City, most new jobs are being created in other sectors. For example, while 20,300 private sector jobs were added in New York City over the last 12 months, only 4,900 were in financial services with the remaining 15,400 in growth industries such as healthcare, technology and education. It is expected that these industries will continue to grow through 2012. If 15,000 new jobs were created in 2012 and if each new position resulted in net absorption of 150 square feet of space (using a more conservative figure than 200 cited earlier), then this would result in net absorption of 2.25 million sf of space, more than offsetting the increase in supply of space by the Wall Street firms.
Even under a very aggressive scenario of 2.0 million sf of space coming onto the market – 50% of excess space according to the above example, or roughly 45 percent of the financial services sublet space that came on the market in 2009, it is quite plausible that under steady employment conditions, all excess space as a result of the layoffs would be absorbed and there would be a net demand of new space.
In summary then, while we anticipate large employment reductions as a result of the banking crisis, we believe that New York City will remain a vibrant economy and that the New York Office Market will not be affected by the Wall Street job cuts. Users of space in New York City should not rely on a decline in the market as a result of Wall Street jobs cuts when making their corporate real estate planning decisions.