Real Estate Forum - October 2011

NEWS FRONT
Hedge Fund Activity Creates Space Need

NEW YORK CITY—In spite of the dicey financial climate, hedge funds continue to see an inflow of cash. Industry-wide, the funds had $1.8 trillion in assets under management for the second quarter of 2011, according to data from BarclayHedge. And in June, hedge funds took in a whopping $3.8 billion, resulting in a $73-billon inflow total for the first half of 2011.

This money flowing in has translated into real estate needs, as funds, many small and spun off from either larger vehicles or investment banks, look for space in Manhattan and Connecticut’s Gold Coast of southern Fairfield County. This can be a tricky proposition, due to factors like infrastructure and time requirements.

“The requirement depends a lot on
their focus,” explains Lou D’Avanzo, exec-
utive vice president at Cushman &
Wakefield, who says that he’s representing
four or five different groups, including a
real estate fund and two from private
equity. “If they’re much more of a portfo-
lio-oriented shop, it’s more office inten-
sive, with some open space and maybe a
small trading desk. If you have a group
that is very trading oriented, they’re going
to want heavy infrastructure.”
D’Avanzo says that due to the changing
landscape of banking—brought about by
financial regulations and the overall eco-
nomic climate—proprietary trading desks
being spun off from large banks and sud-
denly needing space have become more
common. Giants Morgan Stanley and
JPMorgan are just two examples of banks
that have, within the past year, begun shut-
tering prop-trading operations. Those
banks “went to more of this commercial
banking model and got rid of the prop-
trading desks,” D’Avanzo says. Following a
spinoff, “All of a sudden a prop-trading
group might come out with an initial
requirement,” he adds.

Cities Outdo Suburbs—The Cases of NYC and Boston

The two largest metropolitan areas in the Northeast—New York City and Boston—have thus far managed to recover from the recent recession much faster than many other areas of the US. And within these markets, the city centers have generally outperformed their suburbs.

At the end of the third quarter of 2011, Manhattan rang in with an overall office vacancy of 11%, down from its recent recession high of 13.5% in Q4 2009, while the average asking rent has begun to climb again. In contrast, the larger NYC suburbs of Westchester County, NY and Fairfield County, CT have had more trouble gaining traction. Both Westchester and Fairfield have ebbed and flowed slightly but generally have recorded vacancy rates above the 15% mark since the turn of the 21st century. Rents have been incredibly flat as well and remain half of those of Manhattan.

Boston has experienced much of the same, with the overall availability in the city proper at 18% with positive absorption (and much stronger activity within several core submarkets) while negative absorption continues to plague the suburban markets, with an overall vacancy rate of 23%. A flight to quality and lower pricing have allowed former suburban tenants to take CBD space that, in some cases, was formerly occupied by shrinking financial services firms.

So, why have the core markets of New York and Boston outper-

By Robert Sammons

formed their suburbs? The answers include the following:

Global Markets. Boston and New York City are well known internationally as safe havens, and the areas that are known best are the diversified, mixed-use centers of each. If an international company is buying or looking to open an office in either of those markets, this is the place they will look first.

Consolidation. To save money and enjoy a more cohesive work force, larger companies are consolidating into modern buildings with open plan layouts, allowing for increased density, many of which exist in the central cities.

Demographics. The young (and not so young) favor mixed-use areas where they can walk or take mass transit to their workplace, enjoy the urban environment, not spend time commuting and take advantage of the synergy of having like-minded companies nearby. Those companies that find themselves in a growth mode today tend to be start-up financial services firms, tech firms and new media firms—all hugely popular in both New York and Boston.

For these reasons, in particular, expect the cities to continue to outperform their suburban rivals for some time to come. That said, there is one potential pitfall: occupancy cost. Though both central markets are more expensive even today, the benefits have, for the most part, outweighed the costs. This could change if new green construction blossoms in the suburbs and occupancy prices rise prohibitively in the urban New York and Boston markets.

Robert Sammons is vice president of research at Cassidy Turley, based in New York City. He may be contacted at robert.sammons@cassidyturley.com. The views expressed here are the author’s own.