Fitch: Wall Street Job Contraction to Pressure NYC Office REITs

NEW YORK--(BUSINESS WIRE)-- Job decline on Wall Street is expected to continue according to a New York state report released Tuesday Oct. 10, substantiating Fitch Ratings' expectation that job contraction could negatively affect New York City-focused office real estate investment trusts (REITs).

On Tuesday, the New York state comptroller released its report forecasting additional contraction on Wall Street through the end of 2012, citing weaker trading volumes (including proprietary), a slowing U.S. economy, and the impact of the regulatory environment as drivers. We agree that additional job cuts are likely, placing New York City-focused office REITS under additional pressure. The report notes that the city lost 20,200 net financial services jobs since November 2007.

Financial services job growth has long been a key driver for New York City office fundamentals, with a lagging impact on related industries' space requirements, including accounting and law firms. New York City office fundamentals have improved materially but reflect financial services' contraction, with persistently high tenant improvements and leasing commissions required on transactions. The uncertainty in downsizing has clearly been reflected in those fundamentals, which we have incorporated into the ratings of New York City-focused REITs SL Green Realty Corp. ('BB+') and Boston Properties Inc. ('BBB'). While we have a Stable Rating Outlook for both companies, their longer term earnings power is still affected by the vibrancy of Wall Street employment.

For SLG (46% of base rental revenues come from financial services and legal tenants), we believe a reduction in financial services employment likely would negatively affect the performance of the company's portfolio, particularly upon lease expirations. While the company is subject to significant industry exposure, the concern is somewhat mitigated in the near term by the manageable lease expiration schedule and the fact that the company's largest financial industry tenants, Citigroup and Credit Suisse, are both rated 'A'.

Boston Properties (54% of gross rent is derived from financial services and legal tenants) would also come under increased pressure if financial tenants continue to reduce their space footprints and remain reluctant to expand. Law firms are also reducing footprints, but unlike financial firms, they are signing large leases at prime locations, underscored by recent activity at the company's development at 250 West 55th street in Midtown Manhattan.

We note some REITs have taken steps to offset ramifications of expected Wall Street job losses by proactively addressing large later year lease maturities and increasing their exposure to submarkets favored by other industries. Last week, SLG acquired two office buildings located on the Chelsea/Flatiron border for $173 million which we believe was done in an effort to cater to more technical- and/or media-related clientele.

Additional information is available on www.fitchratings.com.

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