“The market has been running hot and cold of late, matching volatility in the broader economy. Some buildings have enjoyed stronger demand, but space in others has languished as tenants act cautiously. Landlords are moving to meet or beat the market, particularly those facing large vacancies in 2018 or later. Asking rents have barely budged, but incentives such as pre-built packages are becoming more prevalent.” Matt Barlow, Executive Vice President Savills Studley Report New York City office sector Q2 2016 Savills Studley Research New York City SUMMARY Market Highlights AVAILABILITY RATE STABLE Manhattan’s overall availability rate was unchanged, remaining at 10.4%. Midtown’s Class A availability rate fell by 0.3 pp to 10.8%, offsetting an increase of 0.8 pp Downtown to 16.2%. Midtown South's overall availability ticked up by 0.1 pp to 8.9%. RENTS DECLINE Overall asking rent fell by 2.5% from $75.34 to $73.44 in the quarter, due primarily to adjustments in Downtown's Class A rent, which fell by 3.0% to $65.24. Midtown's Class A rate was stable, inching 0.3% lower to $88.72. Of note, Class B and C rent for all of Manhattan was also nearly unchanged, falling by merely 0.3% to $65.41. LEASING ACTIVITY RISES Leasing activity totaled 8.0 msf during the second quarter as volume in Midtown exceeded 5.0 msf for only the second time in the last eight quarters. A flurry of transactions in Grand Central boosted totals. Deal volume Downtown (1.1 msf) fell to its lowest mark in a year. Midtown South continued its remarkable string of 1.0 msf leased per quarter – the fifth consecutive quarter it has hit this mark and 12th time in the last 13 quarters.
Transcript
“The market has been running hot and cold of
late, matching volatility in the broader economy.
Some buildings have enjoyed stronger demand,
but space in others has languished as tenants
act cautiously. Landlords are moving to meet or
beat the market, particularly those facing large
vacancies in 2018 or later. Asking rents have
barely budged, but incentives such as pre-built
packages are becoming more prevalent.”
Matt Barlow, Executive Vice President
Savills Studley Report New York City office sector Q2 2016
Savills Studley Research New York City
SUMMARYMarket Highlights
AVAILABILITY RATE STABLE
Manhattan’s overall availability rate was unchanged, remaining at 10.4%. Midtown’s Class A availability rate fell by 0.3 pp to 10.8%, offsetting an increase of 0.8 pp Downtown to 16.2%. Midtown South's overall availability ticked up by 0.1 pp to 8.9%.
RENTS DECLINE
Overall asking rent fell by 2.5% from $75.34 to $73.44 in the quarter, due primarily to adjustments in Downtown's Class A rent, which fell by 3.0% to $65.24. Midtown's Class A rate was stable, inching 0.3% lower to $88.72. Of note, Class B and C rent for all
of Manhattan was also nearly unchanged, falling by merely 0.3% to $65.41.
LEASING ACTIVITY RISES
Leasing activity totaled 8.0 msf during the second quarter as volume in Midtown exceeded 5.0 msf for only the second time in the last eight quarters. A flurry of transactions in Grand Central boosted totals. Deal volume Downtown (1.1 msf) fell to its lowest mark in a year. Midtown South continued its remarkable string of 1.0 msf leased per quarter – the fifth consecutive quarter it has hit this mark and 12th time in the last 13 quarters.
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Savills Studley Report | New York City
Hot and Cold
The Manhattan office market is running hot and cold. Some buildings have enjoyed stronger leasing in the last few months, but demand has stalled in others. Landlords have varying tolerance levels for choppy demand - established private owners and those with negligible vacancy can ride out the slowing activity, others have to adjust by offering more aggressive lease terms. The same sort of uneven performance can be seen in the general economy. Newer companies are struggling to deal with a chillier response from investors. The sharp pullback in IPO issuances has started to winnow the field of tech startups – some companies unable to secure funding for their next phase of growth have cut operations, merged with another firm or shut down entirely. Selective tenants and cautious investors are taking their toll on landlords and new businesses alike.
So far this year, global equity markets have absorbed two massive sell-offs, pushing investors to safe havens. Following the correction at the start of this year, it took several months for exchanges to recoup losses, this time around they appear to be rebounding more quickly. Tenants were already stepping carefully before Brexit, in the short-term the seesaw of equity markets and geopolitical turmoil may give more companies cause to proceed cautiously.
Some Landlords Moving to Meet or Beat the Market
Many Class A landlords are doing their best to get ahead of a market that appears likely to be very soft the closer it gets to 2018. A few owners with elevated occupancy or steady momentum are holding out for the top bidder or the best tenant, but most landlords in the Class A sector are scrambling to shore up their tenant roster. In turn, landlords in both Midtown and Downtown are stretching a bit more to get deals done. Concessions remain elevated. Free rent periods have increased recently to at least one month free per year of lease term. Additionally, landlords are pre-building space for smaller to mid-sized tenants as they cater to tenants’ efforts to contain costs. A few owners are going so far as to introduce furniture packages to offset out-of-pocket expenditures by tenants.
Companies can more easily digest the disruption and cost of relocation if the landlord provides generous build-out allowances or pre-builds the space. Tenants are not in a hurry to commit to space.
Tenant Sq Feet Address Market AreaUBS Group* 890,861 1285 Avenue of the Americas Columbus CircleNYU Langone Medical Center 376,765 222 E 41st St Grand Central PwC 241,196 90 Park Ave Grand CentralD. E. Shaw & Co., L.P.* 195,375 1166 Avenue of the Americas Grand CentralCredit Suisse AG* 186,396 11 Madison Ave Park Ave S./Mad Sq.Simons Foundation 137,737 162 Fifth Ave FlatironMerrill Lynch 125,000 75 Rockefeller Plz Plaza IIAlston & Bird, LLP* 122,525 90 Park Ave Grand CentralNew York Life Insurance Company** 114,709 420 Lexington Ave Grand CentralQBE North America 97,228 55 Water St Financial DistrictSum of Top Leases 2,487,792 Sum of 2nd Quarter Leasing Activity 8.0 MSF
Owners that wait too long for the market to come to them, and hold out for their dream deal, run the risk that a competitor will hit the tenant’s bid.
Owners with significant lease rollovers in 2018 through 2020 are nervous because there will be so much Class A space being offered for lease in that time-frame. Midtown and Downtown have a combined 24.4 msf of Class A space available for lease as of mid-year, this total is likely to approach 30.0 msf by early 2018. In Midtown, 20,000 to 50,000 sf users have an abundance of Class A options to consider. A total of 70 buildings have a contiguous block of at least 50,000 sf or more available for lease, 149 have a contiguous block of 20,000 sf or larger. Downtown is loaded with high-caliber Class A space – there is currently 6.4 msf of Class A space available for occupancy now or within the next 12 months, with at least another 2.1 msf available by late 2017 or later not yet included in availability.
Getting out in front of the looming spike in Class A space options does not always mean that all landlords are rushing to lock in tenants. Some owners are taking the time to remedy amenity deficiencies and outdated space buildouts in older properties. New and renovated product at the World Trade Center and Brookfield Place created a path for movement by some of the city’s biggest companies, particularly those in margin-pressured sectors such as publishing. The flow of publishing and media companies to Lower Manhattan, followed by a second wave of firms in multiple industries to the Far Westside, has set the stage for extensive building repositioning. Owners are transforming spaces that in some cases have been occupied by the same tenant for several decades. A few landlords are recapturing space to upgrade as much of their asset as they can. Manhattan landlords have an opportunity to respond to the changing preferences of tenants by offering amenities such as outdoor space, conference centers, gyms, bike rooms and adding Wi-Fi throughout the building.
Leasing Sends Mixed Signals
The Class A average rent for Midtown ($88.72) was stable. Asking rent in Midtown East has fallen in recent months, though. Class A rent in Grand Central dipped by 4.2% to $78.40 quarter-on-quarter. Leasing activity in Midtown rebounded, reaching 5.0 msf for only the second time in the last eight quarters. Midtown's Class A availability barely budged, inching 30 basis points lower to 10.8%. Demand for the highest-priced space appears to be losing some of its
punch. Available Class A space in the Plaza District has increased by nearly 1.0 msf in year-on-year. During the same period, leasing volume in the Plaza District has been running about 15.0% below its long-term average.
Downtown posted its weakest leasing volume (1.1 msf) since mid-year 2015. Downtown has its hot pockets. Class A space in pre-war buildings has been picked over a bit as tenants have targeted full floors on upper levels. Landlords that have followed through on major capital improvement programs or those that have adjusted rents enjoyed some pickup in leasing velocity. Downtown’s Class A sector has become quite top-heavy. Tenants have leased up most of the mid-$40.00 to low-$50.00 space, pushing the bottom range of rent Downtown to the mid-$50.00/sf mark – of the 7.5 msf of direct space with a disclosed rent, 5.6 msf (75.8%) is priced at $55.00 or higher.
Midtown South has been Manhattan’s most consistent market in the last few years.
Leasing has exceeded the long-term quarterly average of 1.0 msf in 10 of the last 12 quarters. Mid-sized and larger tech companies are still expanding and are on the prowl for more talent and space. First Data and Samsung are reportedly looking for more than 100,000 sf. Competition among 20,000 to 50,000 sf tenants for space is still brisk, with particularly strong demand for built space.
Midtown South has merely 22 buildings with a block of 50,000 sf or more, and 79 properties offering a contiguous block of at least 20,000 sf. Of note, though, Midtown South had the biggest increase in sublet supply space additions in the last three months – with nearly 500,000 sf of sublet space added. Some of this sublet space is likely coming from smaller TAMI tenants struggling in the current climate. More of the startups of 2012 and 2013 have matured, or have been absorbed by larger firms, and the novices of 2014 and 2015 are either streamlining or shifting to less expensive locales.
17 City Hall 3,156 30 99 -2.4% 75 3.1% -0.3% 2.4% $46.75 2.1% $46.42City Hall - Class A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
18 WTC/Brookfield Place 31,506 415 4,294 16.9% 5,143 13.6% 1.0% 16.3% $64.84 -5.6% $60.38WTC/Brookfield Place - Class A 18,911 208 3,000 0.0% 3,432 15.9% 0.0% 18.1% $69.76 -7.2% $65.99
19 Financial District 49,772 652 5,537 0.9% 5,773 11.1% 0.1% 11.6% $56.01 3.8% $48.58Financial District- Class A 19,968 382 3,432 N/A 3,783 0.0% 0.0% 0.0% $60.82 4.8% $51.14
1-8 Midtown 275,327 5,529 29,091 -2.0% 27,234 10.6% -0.2% 9.9% $79.78 1.2% $78.92Midtown - Class A 165,892 3,615 17,976 -2.4% 17,250 10.8% -0.3% 10.4% $88.72 -0.3% $90.77Midtown South Total 81,940 1,327 7,290 -2.2% 7,239 8.9% 0.1% 8.8% $76.01 -2.2% $79.32Midtown South - Class A 7,281 669 117 -6.6% 287 1.6% 0.0% 3.9% $133.24 -6.6% $115.74Downtown Total 90,399 1,170 10,346 4.3% 11,340 11.4% 0.5% 12.5% $61.71 -0.7% $53.72Downtown Total - Class A 39,643 590 6,432 5.5% 7,215 16.2% 0.8% 18.2% $65.24 -3.0% $56.35Manhattan Total 447,666 8,026 46,727 -0.2% 45,812 10.4% 0.0% 10.2% $73.44 -2.5% $72.15Manhattan Total - Class A 212,816 4,874 24,525 -0.4% 24,752 11.5% 0.0% 11.6% $79.65 -4.2% $80.71
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(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.
