Savills Studley Report New York City office sector Q3 2018 · 2019. 1. 9. · Carlyle Group 94,367 1 Vanderbilt Ave Grand Central Sum of Top Leases 1,815,282 Sum of 3rd Quarter Leasing

"WeWork recently supplanted JPMorgan Chase as the top tenant in Manhattan. There can be no disputing coworking's success in disrupting office leasing. It will take a recession to see if this sector's footprint will become a fixture or falter instead."

Jeffrey Peck, Vice Chairman

"Leasing activity has been running above average since the start of 2017. A recent burst in economic growth, coupled with a willingness among firms to invest in the workplace has kept volume in Midtown elevated. Even so, leasing is barely keeping pace with the delivery of new supply and continued space densification."

Erik Schmall, Vice Chairman

Savills Studley Report New York City office sector Q3 2018

Savills Studley Research New York City

SUMMARYMarket HighlightsLITTLE CHANGE IN AVAILABILITY

Manhattan’s overall availability rate inched lower, falling from 11.7% to 11.6%, but has increased by 40 basis points from a year ago. The Class A availability rate fell by 40 basis points to 12.3%, with a 140 basis point decrease in Midtown South's Class A rate to 12.9% and 30 basis point declines in both Midtown and Downtown, to 10.9% and 17.2%, respectively.

OVERALL RENT FALLS SLIGHTLY

Manhattan’s average asking rent decreased by 0.3% from $74.41 to $74.21 during the third quarter. Rent increased by 0.6% compared to the third quarter of 2017.

Midtown's Class A average rent inched up by 0.2% to $89.35.

LEASING DECLINES IN QUARTER

Leasing volume fell to 8.4 million square feet (msf) in the third quarter. Several substantial bank leases, and continued growth in the coworking sector, topped leasing activity. Year-to-date leasing (28.5 msf) is the highest it has been since 2014.

INVESTMENT SALES RISE

Office property sales during the first seven months of the year totaled $11.6 billion, a 46% increase compared to the first seven months of 2017.

02

Savills Studley Report | New York City

Tenants of First Resort

Conditions are far from normal in Manhattan’s office market. Some of the market dynamics driving leasing are familiar, others are not. Brisk demand for talent and increased expenditures on the workplace by business services and banking are par for the course. On the other hand, leasing is boosted by unprecedented levels of competition for space among tech companies as well as coworking providers.

Business fundamentals underlying office space demand are as strong as they have been in the last several years both nationally and in Manhattan. Companies are investing in payroll expansion and the workplace. Leasing activity has been running about 20% above its historical average since the start of 2017. Tenants leased 61.8 msf since the start of 2017, well above the 50.2 msf leased in the prior seven quarters. More than 90 leases over 100,000 sf have been signed since the start of 2017, compared to 73 in the prior seven quarters. Finance and insurance accounted for nearly 30 of the leases in the recent surge. Coworking providers represented nine of the 100,000-plus sf deals.

Modest Expansion in the Core

What has brought this surge of demand since 2017? For one, Manhattan’s core tenant base is expanding with growth in sectors ranging from general business and personal services to non-profits such as The Nature Conservancy. Financial services account for the biggest expansions. Evercore Partners, Apollo Global Management and Hall Capital Partners have all expanded recently. Wall Street profits through the first half of 2018, totaled $13.7 billion, the most since 2010. Additionally, the tax reform bill passed in late 2017 is providing some companies a bit of a windfall. Some firms are deploying the extra funds to add employees and increase their lease commitments. Firms are leasing high-quality space with natural light and views. Buildings with extensive amenities that enhance employee comfort provide recruiting and retention advantages.

Facebook Nudges WeWork

Demand from traditional firms has jumped within the last few quarters. Expansion among core tenants is not what is giving this leasing market its punch. Rather, intensifying demand among tech and coworking companies pushed activity to another level. Tech and coworking companies are sometimes crossing paths as competitors for space. Facebook reportedly is taking the entirety of 63 Madison, bumping WeWork from the spot. Google and WeWork are leading the charge

Source: Bureau of Labor Statistics

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60Millions

NYC Off. Emp. NYC (% Annual Change) U.S.(% Annual Change)

Office-Using Employment Trends

$78.46$78.03

$76.13$70.59$63.41$64.41

$0

$20

$40

$60

$80

$100

Q3 '18Q2 '18Q1 '18Q4 '17Q3 '17

Overall Rental Rate Trends

Midtown Midtown South Downtown

Asking Rent Trends (All Classes) ($/sf)

11.3%11.5%

9.2%8.4%

14.6%13.0%

0%

5%

10%

15%

Q3 '18Q2 '18Q1 '18Q4 '17Q3 '17

Overall Availability Rate Trends

Midtown Midtown South Downtown

Availability Rate Trends (All Classes)

savills-studley.com/research 03

Q3 2018

Tenant Sq Feet Address Market AreaPfizer^ 350,000 219 E 42nd St Grand CentralEvercore Partners Inc.** 350,000 55 E 52nd St Plaza DistrictWeWork 258,344 368 Ninth Ave Penn Plaza/GarmentBessemer Trust 239,000 1271 Avenue of the Americas Columbus CircleConvene 116,000 530 Fifth Ave Times SquareSpaces 109,364 405 Lexington Ave Grand CentralSpaces 100,613 287 Park Ave S Gramercy ParkSpaces 99,000 787 11th Ave Columbus CircleIndustrial and Commercial Bank of China 98,594 1185 Avenue of the Americas Times SquareCarlyle Group 94,367 1 Vanderbilt Ave Grand CentralSum of Top Leases 1,815,282 Sum of 3rd Quarter Leasing Activity 8.4 MSF

among tech and coworking companies. Google’s East Coast campus is completely transforming Hudson Square. Google’s demand has spilled well beyond its owned building at 111 Eighth, into multiple buildings in Hudson Square. The behemoth is reportedly working on leases exceeding 1.0 msf on the Far Westside. Tenants in Hudson Square are increasingly being pushed to other areas. It is not just Google or Hudson Square, though. Tech and creative sector growth is sparking intense competition for space between 28th and Canal Street. In Flatiron, competition among coworking providers combined with strong demand from Fortune 100 companies, has stripped this submarket almost bare of big blocks of space. First to Lease Many Hudson Square landlords now hold space to see if Google will bite. Landlords across Manhattan with a big block of space on lower floors are banking on WeWork to swallow space. Why bother with a marketing program? The two companies have become tenants of first resort.

Google and WeWork also support leasing from related firms. Vendors and contractors congregate around Google. Competitors are trying to keep up with WeWork, further increasing the impact of fractional office space providers on availability. WeWork added 500,000 sf in the third quarter. Spaces (Regus’ coworking subsidiary) took just over 300,000 sf - absorbing three big blocks at 405 Lexington Avenue, 287 Park Avenue South and 787 11th Avenue. Knotel also added five locations, pushing its presence in Manhattan to more than 1.4 msf. Meanwhile, WeWork offers hefty discounts to firms opting to relocate from competing centers. These providers are chasing market share – carving out a segment of the market (commodity space) that would otherwise lease only through a sharp discount or have to be repositioned.

As WeWork, Spaces and Knotel continue their growth, another group of fractional office space providers are positioning themselves as the “bespoke and agile” specialists in this evolving space. Industrious, for example, is partnering with tenants and landlords, highlighting its ability to co-create flexible space with tenants. Convene is customizing the amenity and services package for several landlords.

The Flex Option

The strongest selling point of coworking space for traditional corporate tenants is its flexibility. Coworking space frees tenants from long-term commitments, but they will sacrifice how much

they can customize space in these centers. Traditionally, landlords have been unwilling to fit space with high-end installations and finishes unless the tenant is committed to at least five years or more. Even when they have, there is typically a big recuperation clause. The proliferation of coworking space options, in tandem with an abundance of space options for small and mid-sized tenants has disrupted the market in multiple ways. Tenants that want to wait out the market or delay major expansions now have several million square feet of options. It is no longer just coworking providers fulfilling this need. Some landlords are jumping on the flex space bandwagon. Tenants wanting to wait out the market or unable to commit can extend their lease or take coworking space. A significant increase in sublet space or built space, would change the equation entirely, creating a third option for tenants. A fourth option may be available if more landlords simply decide to set up flex space in their portfolio, and offer that as an added service to their tenants.

Flex space whether it is from a landlord, sub-lessor or a fractional office space provider expands the range of options available to firms. Treading Water If any one of these recent drivers of office space demand dissipates, the current burst could peter out. Even with all of this support, the market as a whole is barely keeping up with the continued addition of new product and the space givebacks coming from ongoing space consolidation. Much of the market seems to be treading water. Availability is up by 40 basis points from a year ago across all of New York City and has increased steadily Downtown. Demand has barely kept up with new construction and densification. And more buildings are poised to hit the market in the next few years – both from new construction and repositioned properties.

Rental Rate Comparison ($/sf)

Major Transactions

**Renewal & Expansion ^Sale-Leaseback

$103.67$100.95$100.70

$90.82$86.15

$78.46$77.33$76.13$76.00$75.01$74.96$74.80$74.21$74.20$72.84

$70.48$69.05$68.77

$64.43$63.81$63.41

$57.84$52.38

$34.37

$0 $15 $30 $45 $60 $75 $90 $105 $120

Hudson YardsSoho

Plaza NorthGreenwich Village

Plaza SouthMidtown

Columbus CircleMidtown South

ChelseaTimes SquareUnion Square

Hudson SquareManhattan

Grand CentralPark Ave S./Madison Square

TribecaWTC/Brookfield Place

East Side/UNFlatiron

Penn Plaza/TSQ SouthDowntown

Financial DistrictCity Hall

U.S. Index

4.9%6.5%

7.8%8.1%8.6%9.2%10.1%10.2%10.6%10.9%11.3%11.3%11.4%11.6%12.1%12.3%12.6%

13.4%13.6%

14.6%15.2%

17.5%18.1%

20.6%

0% 5% 10% 15% 20% 25%

City HallUnion Square

Greenwich VillageFlatiron

Park Ave S./Madison SquareMidtown South

ChelseaPenn Plaza/TSQ South

Columbus CircleTimes Square

Grand CentralMidtown

Plaza NorthManhattan

SohoHudson Yards

Plaza SouthFinancial DistrictHudson Square

DowntownTribeca

WTC/Brookfield PlaceU.S. Index

East Side/UN

Availability Rate Comparison

Savills Studley Report | New York City

04

Map Submarket Total

SF(1000's) This Quarter This

Quarter

%Change

fromLast Qtr.

YearAgo

ThisQuarter

ppChange

fromLast Qtr. (1)

YearAgo

ThisQuarter

%Change

fromLast Qtr.

YearAgo

Columbus Circle 27,548 513 2,907 0.7% 2,310 10.6% 0.1% 8.4% $77.33 2.6% $76.98Columbus Circle - Class A 19,453 405 1,858 2.6% 1,485 9.6% 0.2% 7.6% $84.66 2.9% $81.86Times Square 32,586 632 3,567 9.9% 3,539 10.9% 1.0% 10.8% $75.01 -5.2% $76.04Times Square - Class A 28,190 394 2,409 -8.4% 2,217 8.5% -0.8% 7.9% $82.56 -2.5% $81.04Hudson Yards 7,413 0 915 -1.8% 608 12.3% -0.2% 8.9% $103.67 -4.3% $89.50Hudson Yards - Class A 6,106 0 895 -0.2% 386 14.7% 0.0% 7.1% $104.70 -4.8% $109.34Penn Plaza/Times Square South 54,638 1,229 5,586 -1.7% 5,216 10.2% -0.3% 9.5% $63.81 -0.9% $62.91Penn Plaza/Times Square South - Class A 8,068 126 683 -12.5% 830 8.5% -1.2% 10.3% $86.29 2.2% $82.95Plaza North 28,662 416 3,253 -22.1% 4,338 11.4% -3.2% 15.0% $100.70 1.6% $96.45Plaza North - Class A 22,080 391 2,700 -25.1% 3,786 12.2% -4.1% 17.1% $106.85 2.9% $101.40Plaza South 42,065 1,406 5,282 5.2% 5,679 12.6% 0.6% 13.5% $86.15 4.1% $88.80Plaza South - Class A 36,987 1,129 4,539 10.4% 5,063 12.3% 1.2% 13.7% $89.07 3.1% $91.12Grand Central 67,591 1,824 7,628 2.2% 8,593 11.3% 0.1% 12.8% $74.20 1.0% $71.13Grand Central - Class A 37,126 942 4,014 5.9% 5,099 10.8% 0.5% 13.9% $84.38 1.1% $76.81East Side/UN 3,005 0 620 4.2% 31 20.6% 0.8% 1.0% $68.77 0.1% $63.03East Side/UN - Class A 783 0 182 9.6% 1 23.2% 2.0% 0.2% $79.21 -0.3% N/A

9 Chelsea 16,842 183 1,697 -7.5% 1,746 10.1% -0.8% 10.4% $76.00 -2.9% $67.16Chelsea - Class A 1,051 6 346 -11.3% 387 33.0% -4.2% 36.9% $133.60 -0.3% $125.43

10 Flatiron 13,578 238 1,099 7.6% 919 8.1% 0.4% 6.9% $64.43 -1.1% $68.49Flatiron - Class A 858 58 0 -100.0% 0 0.0% -6.7% 0.0% N/A -100.0% N/A

11 Park Ave South/Madison Square 23,417 321 2,007 18.4% 1,682 8.6% 1.3% 7.2% $72.84 5.8% $65.63Park Ave South/Madison Sq. - Class A 3,413 0 100 0.0% 0 2.9% 0.0% 0.0% $98.00 0.0% N/AUnion Square 7,724 205 498 -21.7% 506 6.5% -1.9% 6.7% $74.96 -4.8% $75.36Union Square - Class A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/AGreenwich Village 7,452 120 579 -4.1% 372 7.8% -0.6% 5.2% $90.82 -3.4% $84.14Greenwich Village - Class A 995 2 194 14.8% 100 19.5% 1.4% 12.2% $126.10 -14.7% $125.37

14 Hudson Square 8,494 115 1,158 -13.1% 943 13.6% -2.1% 11.1% $74.80 0.8% $77.60Hudson Square - Class A 2,065 22 341 -14.9% 0 16.5% -2.9% 0.0% $75.58 3.2% N/A

15 Soho 4,422 194 536 -12.4% 622 12.1% -2.3% 15.0% $100.95 9.9% $75.56Soho - Class A 262 N/A 135 21.4% 86 51.4% 4.8% 36.3% $105.20 -2.4% $116.65

16 Tribeca 4,948 0 752 6.3% 544 15.2% 0.8% 11.1% $70.48 -0.8% $74.12Tribeca - Class A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

17 City Hall 3,962 75 195 -14.1% 300 4.9% -1.0% 7.8% $52.38 -1.4% $53.54City Hall - Class A N/A N/A NA NA N/A N/A N/A N/A N/A N/A N/A

18 WTC/Brookfield Place 32,857 369 5,751 -3.6% 5,737 17.5% -0.7% 17.5% $69.05 0.3% $70.79WTC/Brookfield Place - Class A 21,821 177 3,940 -3.7% 4,307 18.1% -0.7% 19.7% $73.81 -0.3% $76.09

19 Financial District 47,566 608 6,381 6.2% 4,969 13.4% 0.8% 10.4% $57.84 0.1% $56.63Financial District- Class A 21,938 267 3,592 0.8% 3,075 16.4% 0.1% 14.0% $61.75 0.1% $60.03

1-8 Midtown 263,508 6,022 29,758 -0.8% 30,314 11.3% -0.1% 11.5% $78.46 -0.2% $78.03Midtown - Class A 158,792 3,387 17,280 -2.9% 18,867 10.9% -0.3% 12.0% $89.35 0.2% $86.10Midtown South Total 81,929 1,376 7,575 -2.1% 6,791 9.2% -0.3% 8.4% $76.13 0.0% $70.59Midtown South - Class A 8,643 88 1,116 -9.2% 574 12.9% -1.4% 6.8% $105.62 -2.8% $111.96Downtown Total 89,332 1,052 13,079 1.3% 11,550 14.6% 0.2% 13.0% $63.41 -0.2% $64.41Downtown Total - Class A 43,759 444 7,533 -1.6% 7,381 17.2% -0.3% 16.9% $68.61 0.5% $68.86Manhattan Total 434,769 8,450 50,412 -0.5% 48,656 11.6% -0.1% 11.2% $74.21 -0.3% $73.76Manhattan Total - Class A 211,194 3,919 25,928 -2.8% 26,822 12.3% -0.4% 12.8% $83.15 -0.1% $81.92

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LeasingActivity

AvailableSF

AvailabilityRate

Asking RentsPer SF*

1

@SavillsStudleywww.savills-studley.com

Please contact us for further information

*Rent and availability rates in submarkets with a limited amount of inventory are sometimes subject to large fluctuations.(1) Percentage point change for availability rates. Unless otherwise noted, all rents quoted throughout this report are average asking gross (full service) rents psf. Statistics are calculated using both direct and sublease information. Short-term sublet spaces (terms under two years) were excluded.

The information in this report is obtained from sources deemed reliable, but no representation is made as to the accuracy thereof. Statistics compiled with the support of The CoStar Group. Copyright © 2018 Savills Studley

Savills Studley399 Park Avenue11th FloorNew York, NY 10022(212) 326-1000

Chairman & CEOMitchell S. Steir [email protected](212) 326-1000

Corporate Research ContactsKeith DeCoster - Director, U.S. [email protected]

Lesley Kamnitzer - Research [email protected]