“Not too hot, not too cold, it’s just right”. This Goldilocks scenario describes today’s economy as Bernanke and the Fed keeps the interest rate at 5.25%. This soft landing is a result of inflation being held at 2.2% and the GDP for 2006 ending at a respectable 3.4%. The impact of this economy on the national office market has been upbeat. Space has been absorbed faster than new buildings were built resulting in a low national vacancy rate of 12.2% and spiking rental rates averaging $24.12.
Essentially the country has caught up to Long Island as the service sector has boomed throughout the country. Unfortunately, the boom on Long Island has become slow growth keeping the Long Island unemployment rate at 3.4% and the office vacancy rate steady at 10%. The new buildings recently developed on Long Island are almost fully occupied. Another 1 Million square feet of new office construction to be built on LI will also be rapidly absorbed by companies fleeing the skyrocketing NYC rental rates.
The end result of this steady demand but limited supply is spiking rental rates. Having increased by 6% from a year ago, $30.00 PSF is now the norm for “A” buildings and $25.00 to $28.00 PSF for “B” buildings. This scenario has made the buildings and portfolios excellent take-over targets as landlords play musical buildings. Thus, while the temperature may be “just right” for landlords, it’s gotten “too hot” for tenants.
– Ross Selinger