A Fresh Take on CRE

The Shadow Knows! - or, What is Shadow Space?

As you can see from the Grubb & Ellis Fourth Quarter Market Trends, vacancy rates in Manhattan have increased from 4.5% to 6.6%.  A big jump, yes, but it does not nearly convey the scope of the NYC commercial real estate downturn.  The report goes on to say, that available space (space that isn't actually vacant now but will be available within the next 12 months)  grew from 7.7% to 11.6%. This starts to tell the real story, but there is one last element that has to be accounted it for, and that is what those of us in the industry refer to as "Shadow Space."

"Shadow Space" is simply space that we believe can be rented, but is not actually on the market. This space may be occupied or may not be.  There is no way to know exactly how much shadow space is available, but due to rapid downsizing at large companies throughout the city, one thing is for sure . . . there is a lot of it.

So, you may wonder, "If companies have space available to be rented, why don't they just put it on the market."  Well, there are countless reasons for this, but here are a few.

1) Some companies are looking to consolidate their employees into 1 or more buildings, but they haven't decided which buildings to consolidate into.  If they get an offer for their space in one building, they'll move everyone to another.

2) Real estate executives may not want to officially recognize space as available.  If they do, they will be held accountable for subleasing that space and will have to report to their bosses if/when it does not get subleased.

3) If space is recognized as not being utilized, the companies will have to write it off every month that it sits, they may prefer not to do that (particularly the RE group).

4) Some of the shadow space is in buildings that are under construction or planned for construction. 

5) Building out space for a corporate user is expensive.  If a company thinks that they may need the space again, it may be worth sitting on it for a while rather than subleasing it, and then having to build out new space in the future (or leasing new space for more than they are getting from the sublet).

Right now, we believe that there is approximately 21 mm SF of shadow spadow space in the Manhattan market, including the World Trade Center development.  Without the WTC, the total amount of sublease space is around 14 mm.  Add that to the current available space on the market - 42 mm, and you get 63 mm with the WTC, and 56 mm without the WTC, or 17.4% and 15.5% availability rates respectively. Keep in mind, that a huge chunk of that space is sublease space which naturally trades at a large discount to direct space. Now you're seeing the real picture of what's going on!