Finance industry absorption is no longer the elephant in the room, literally and figuratively.
The current pattern of Wall Street taking less overall rentable space is likely here to stay, and commercial real estate firms are no longer being silent that the absorption landscape has changed for good.
“This is the first recovery in more than a generation that was not led by Wall Street,” said Barbara Byrne Denham, chief economist at Eastern Consolidated.
“[They] usually add jobs ahead of the others. When one firm announces t8hat they are seeking new and expanded space, other firms tend to follow.”
But three years into the recovery, that is not happening with any consistency, said Denham.
“Since bottoming out in 2010, they have only added 5,300 jobs net,” she said.
“They added as many as 9,000 jobs through 2011, but then shed jobs in 2012.”
The lack of Wall Street jobs is having an effect well beyond the finance industry. Law firms, brokers say, are taking much less space as they renew leases or look for new digs, partially due to their traditional economic ties to securities firms.
“Legal services is a subset of financial services in reality,” said Robert L. Freedman, chairman of New York Tri-State for Colliers International. “Their high margin business is predominantly in that sector.
Freedman says that law firms can no longer rely on steady cash flow coming from Wall Street to support some of the lockstep compensation contracts of their older partners.
“I think there has been a secular change among law firms,ˮ he said, “and you now have rainmakers who are commanding significant premiums. The law firm does not have the economic drive to support some of those contracts.”
The spillover is that, as those law firms enact austerity measures, rentable space is on the chopping block.
Brokers say it will be a while until that reality shifts. The law firm business model, they say, is under examination and needs to change, making the days of a broker leasing one third more space than a law firm needs (for warehousing or future growth) a thing of the past.
“You have much more volatility in the law firm business model than you ever had before,” said Freedman. “I think they’re adopting a wait and see posture because they don’t know where the landscape is going.”
And that landscape is not including legal jobs, economists say. “The legal industry still has yet to recover any jobs since the bottom of the recession,” said Denham. “Not only has the city added 274,000 jobs since the bottom of 2009, the level of jobs is 135,500 above the last peak of 2008. Yet the level of legal jobs is 8,600 below the last peak.”
That reality equals additional challenges for brokers who can no longer rely on turn-key legal clients to lease available space.
New York City has the highest amount of unemployed lawyers in the country, according to the Wall Street Journal.
Yet current finance-legal tag team woes have not equaled doom and gloom for the New York commercial real estate industry.
Commercial real estate has rebounded and the city’s economy is not as dependent upon Wall Street as much as it was in the past.
In 2012, the city received $3.4 billion in tax revenues from securities firms, down from $5 billion in 2007, according to a report released by Eastern Consolidated.
City tax revenues have also risen by $7.5 billion over the past three years without any income from Wall Street, according to Denham. That, combined with the tremendous growth and influx of start-ups and technology firms pouring into the city, has brokers moving beyond a co-dependent tie that has bound real estate executives to Wall Street tycoons for decades.
And that might actually be a blessing in disguise.
“It’s been crazy over the years watching the real estate market escalate in line with Wall Street only to see it plummet with every Wall Street correction,” said Peter Hauspurg, chairman and CEO of Eastern Consolidated. “The fact that the commercial real estate market has rebounded so significantly in spite of a tepid Wall Street recovery is a welcome development.”