Manhattan Office Market

RESEARCH 1Q 2020 MANHATTAN OFFICE MARKET

HEALTHY START TO FIRST QUARTER CURRENT CONDITIONS

CAPPED BY ONSET OF COVID-19 COVID-19 brought the market to a near halt at the end of the first quarter with much of the population working from home. The first quarter held two distinct chapters: a relatively healthy January and February, followed by a sharp turn with the onset of COVID-19 in Leasing activity totaled 6.2 million square feet, as the typical first quarter March. January and February brought a drop in availability and rise in slow-down was exacerbated by the onset of COVID-19. rents, driven by the delivery of new construction. Leasing activity slowed The first two months of the year showed signs of strength, driving a 20 basis from the fourth quarter, which is relatively common for the first quarter. point drop in availability as just three large blocks came to market. But the drop was steeper this year with the onset of COVID-19.

In March, the pandemic and social-distancing measures brought the office market to a near standstill, with offices closed and much of the MARKET ANALYSIS population working from home. Deal-making dropped, tours stopped, many requirements were put on hold and the governor ordered office Asking Rent and Availability construction to stop. By the end of the first quarter, leasing activity totaled 6.2 million square feet, the lowest first-quarter level since 1Q09. $90 16% While the duration of the pandemic’s impact is currently unknowable, $80 14% $70 reflections on prior downturns offer helpful context. The global financial 12% $60 crisis caused availability to rise for three quarters, followed by an 18- 10% quarter recovery. After September 11th, availability increased for nine $50 8% quarters, followed by another nine quarters to achieve recovery. $40 $30 6% By the end of the first quarter of 2020, Manhattan availability dropped 20 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q18 1Q19 1Q20 basis points quarter-over-quarter to 11.8%. Three large blocks of more Average Asking Rent (Price/SF) Availability (%) than 100,000 square feet came on the market, two of which were at 1740 Broadway. Despite the minimal additions of space, low leasing velocity Net Absorption (SF, Millions) pushed quarterly absorption to negative 766,209 square feet. 6 Coworking providers signed several notable transactions early in the year. Hana leased 85,894 square feet at 3 World Trade Center and Industrious 3 signed 61,623 square feet at 135 West 50th Street. However, no new 0 leases were signed in March and top providers Knotel, WeWork and Convene each shed staff. In addition, WeWork sold 424 Fifth Avenue to -3 Amazon for $1.1 billion in March, up from the $850 million WeWork paid -6 to purchase the building from Hudson’s Bay Company a year earlier. 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q18 1Q19 1Q20 Five buildings delivered this quarter, four of which were in Midtown South, MARKET SUMMARY adding more than 600,000 square feet to market inventory. These were Current Prior Year Ago 12 Month Pier 57, 44 Union Square East, 44 West 37th Street, 150 Fifth Avenue and Quarter Quarter Period Forecast 405-409 West 13th Street. An additional 16.1 million square feet are Total Inventory 460.5 MSF 460.2 MSF 450.6 MSF  already under construction. There were four million square feet expected Availability Rate 11.8% 12.0% 12.2%  to deliver in 2020, but the impact of the governor’s order to halt nonessential construction remains to be seen. Quarterly Net Absorption -766,209 -2,469,848 -1,438,505  Average Asking Rent $81.71 $80.26 $76.34  Before the onset of COVID-19, average asking rents continued their upward progression, causing the first quarter to end at $81.71/SF. Under Construction 16.1 MSF 16.3 MSF 19.8 MSF  Deliveries 0.6 MSF 2.8 MSF 0.2 MSF 

MIDTOWN MIDTOWN SOUTH Last Major Tech Requirement Lands as Apple Finds New Home Asking Rent Surpasses Midtown Average

After Facebook and Amazon signed new leases in the fourth quarter, Like those of Midtown, Midtown South asking rents have surged over Apple was the lone active tech titan left to find a new home. That the past year. They have increased in each of the past four quarters and changed in February when Apple signed a five-year deal, with extension set records over the past three, closing 1Q20 at $86.35/SF. This was the and expansion options, at 11 Penn Plaza for 222,279 square feet. After first time on record that Midtown South asking rents surpassed exploring several options in Midtown South and the Far West Side, Apple Midtown rents. The quarter-over-quarter rent increase of $2.82/SF was agreed to expand its New York City presence beyond its offices at 100- driven by increases of at least $2.25/SF in four of the market’s five 104 Fifth Avenue into the Penn Station submarket. submarkets, with the exception being the East Village.

Driven by market conditions in the first two months of the quarter, The submarket’s rent increase was driven by new construction at 205 Midtown average asking rents continued to surge and set a record for West 28th Street and 76 Eighth Avenue. The addition of 53,000 square the third consecutive quarter, increasing $1.28/SF from the fourth feet of sublease space at One SoHo Square from Juul also contributed quarter to $86.28/SF. Five Midtown submarkets posted rent increases to the increase in rents. of at least $2.00/SF, with the largest gains seen in the Times Square The Midtown South availability rate increased by 60 basis points to and Westside submarkets. In the Westside, 536,550 square feet of 9.9%, after four of the five submarkets saw availability increase. This space that came to market at 1740 Broadway was responsible for the marked the fourth consecutive quarter that availability increased, $4.25/SF jump in rents, as well as the submarket’s 2.4 percentage point reaching its highest point in seven quarters. In addition to space at the jump in availability rate. Flatiron Building and One SoHo Square coming available, two subleases Despite this additional space, the Midtown availability rate fell 20 basis in Chelsea at 22 West 19th Street and 119-125 West 25th Street, each of points from the fourth quarter to 12.5% in the first quarter. This is the which was more than 60,000 square feet, drove availability up. sixth consecutive quarter that availability fell between 12.3% and 12.7%. The drop-off in leasing activity was most pronounced in Midtown South, In five of the eleven Midtown submarkets, there was a drop in the where the largest relocation, a sublease by Teachable at 470 Park availability rate of one percentage point or more. Mirroring the overall Avenue South, was just 30,299 square feet. At 876,000 square feet, Manhattan market, absorption was posted at negative 744,315 square velocity was just 39.5% of the quarterly average over the past two years. feet, after a quarter of below-average activity of 4.0 million square feet. Pier 57, fully leased by Google, was the largest delivery of the first The lone first-quarter new-construction delivery in Midtown was at 44 quarter, followed by 44 Union Square East, 150 Fifth Avenue and 405- West 37th Street, a boutique building in the Garment District that 409 West 13th Street. More than half a million square feet are expected brought 65,000 square feet to market. Other notable Midtown deliveries to deliver in Midtown South later this year, though delivery dates are expected later in 2020 include the 1.7 million-square-foot 1 Vanderbilt likely to be impacted by the governor’s construction halt. The majority of Avenue, the Farley Post Office building and 425 Park Avenue. CA that space will be in the East Village’s Essex Crossing development on Ventures signed the first lease at 106 West 56th Street, a 90,000- Delancey Street. square-foot development, taking a full floor.

AVERAGE ASKING RENT BY SUBMARKET AVAILABILITY BY SUBMARKET

Average Asking Rent ($/SF) Availability Rate (%)

100 20% 18% 80 16% 14% 60 12% 10% 40 8% 6% 20 4% 2% 0 0% 1Q04 1Q06 1Q08 1Q10 1Q12 1Q14 1Q16 1Q18 1Q20 1Q04 1Q06 1Q08 1Q10 1Q12 1Q14 1Q16 1Q18 1Q20

Midtown Midtown South Downtown Midtown Midtown South Downtown

DOWNTOWN Downtown Market Tightens Despite Leasing Plunge Despite the decline in leasing activity, Downtown absorption posted at Asking rents Downtown slightly decreased from the fourth quarter, positive 704,358 square feet. At the same time, the Downtown down to $64.18/SF, following a drop in Downtown West rents. This availability rate dropped by 90 basis points from last quarter to 11.3%, decline was triggered by the leasing of trophy space in the World Trade driven largely by the top deals in Downtown West where availability Center. The market’s two largest deals, 205,461 square feet by MDC dropped by 1.5 percentage points to 12.7%. The lack of new blocks of Partners and 85,984 square feet by Hana, were signed in 1 World Trade 100,000 square feet also contributed to the decreased availability rate. Center and 3 World Trade Center, respectively. Despite these large transactions, leasing velocity was down at the start of the year, with the After 76 Trinity delivered last year, the only remaining construction Downtown market seeing just 1.2 million square feet of activity. This Downtown is at 100 Pearl Street, where extensive renovations are was the market’s lowest total since the first quarter of 2018. Other top expected to be completed later in 2020, adding 80,000 square feet to deals in Downtown West included ad agency Johannes Leonardo’s lease Downtown inventory. Fred Alger leased 50,040 square feet on the at 115 Broadway for 52,000 square feet and Cumulus Media’s sublease building’s 27th through 29th floors in the first quarter. at 300 Vesey for 45,923 square feet.

MIDTOWN LEASE TRANSACTIONS

Tenant Building Submarket Type Square Feet

Apple 11 Penn Plaza Penn Station Direct New 222,279 Sixth Avenue/Rockefeller Fortress Investment Group, LLC 1345 Avenue of the Americas Direct Extension 132,000 Center McLaughlin & Stern LLP 260 Madison Avenue Grand Central Direct Renewal 112,000 Direct Renewal & Hudson Yards Construction 410 Tenth Avenue Far West Side 75,704 Expansion International FCStone 230 Park Avenue Park Avenue Direct New 72,838

MIDTOWN SOUTH LEASE TRANSACTIONS

Tenant Building Submarket Type Square Feet Direct Renewal & Vitech Systems Group 401 Park Avenue South Flatiron/Union Square 60,000 Expansion Teachable 470 Park Avenue South Flatiron/Union Square Sublease New 30,299 FIG Agency 67-73 Spring Street NoHo/SoHo Direct New 25,000 Shopify 148 Lafayette Street NoHo/SoHo Subsublease New 24,630 Public Clothing Company 151 West 26th Street Chelsea Direct New 17,610

DOWNTOWN LEASE TRANSACTIONS

Tenant Building Submarket Type Square Feet

MDC Partners 1 World Trade Center Downtown West Direct New 205,461 Hana 3 World Trade Center Downtown West Direct New 85,984 Johannes Leonardo 115 Broadway Downtown West Direct New 52,000 Fred Alger 100 Pearl Street Downtown East Direct New 50,040 Cumulus Media 300 Vesey Street Downtown West Sublease New 45,923

SUBMARKET STATISTICS

Total Under Total Qtr YTD Direct Sublet Total Inventory Construction Availability Absorption Absorption Asking Rent Asking Rent Asking Rent (SF) (SF) Rate (SF) (SF) (Price/SF) (Price/SF) (Price/SF)

Midtown 288,690,125 13,114,527 12.5% -744,315 -744,315 $89.63 $68.06 $86.28

Eastside 24,719,163 0 16.8% 104,055 104,055 $77.72 $56.13 $76.00

Far West Side 11,748,159 9,662,418 4.9% 45,937 45,937 $118.48 $63.12 $112.73

Grand Central 47,556,123 1,732,955 11.7% -131,142 -131,142 $91.73 $59.35 $88.14

Murray Hill 7,837,204 0 11.2% -59,564 -59,564 $63.47 $58.53 $62.73

Park Avenue 26,969,382 705,244 10.8% 150,529 150,529 $114.08 $75.99 $109.13

Penn Station 22,054,602 923,910 12.0% 226,963 226,963 $95.55 $59.81 $83.81

Plaza District 26,733,087 0 16.8% -212,089 -212,089 $115.27 $99.88 $113.16

Sixth Ave/Rock Center 45,231,157 90,000 10.4% -193,824 -193,824 $88.12 $76.31 $86.34

Times Square 14,663,247 0 17.3% -15,938 -15,938 $82.85 $67.91 $81.49

Times Square South 35,474,092 65,000 9.1% --51,676 --51,676 $58.04 $53.20 $57.09

Westside 25,703,909 0 17.3% -607,566 -607,566 $80.05 $66.67 $76.97

Midtown South 76,559,240 2,936,281 9.9% -726,252 -726,252 $88.54 $77.54 $86.35

Chelsea 26,409,142 1,016,469 9.5% -257,139 -257,139 $74.68 $71.89 $74.00

East Village 1,772,657 414,435 25.7% -8,163 -8,163 $89.16 $59.00 $88.93

Flatiron/Union Square 26,784,800 268,560 10.6% -259,488 -259,488 $89.89 $72.17 $87.14

Hudson Sq./Meatpacking 11,797,533 988,866 7.5% -208,514 -208,514 $110.27 $94.75 $104.04

NoHo/SoHo 9,795,108 247,951 9.1% 7,052 7,052 $103.94 $75.86 $100.57

Downtown 95,272,939 80,000 11.3% 704,358 704,358 $65.92 $57.63 $64.18

Downtown East 49,946,372 80,000 10.7% 245,643 245,643 $59.18 $49.24 $57.63

Downtown West 36,616,541 0 12.7% 485,856 485,856 $70.18 $62.35 $67.84

Tribeca/City Hall 8,710,026 0 8.8% -27,141 -27,141 $89.00 $71.02 $88.48

Manhattan 460,522,304 16,130,808 11.8% -766,209 -766,209 $84.81 $66.86 $81.71

ECONOMIC CONDITIONS EMPLOYMENT BY INDUSTRY Although the national unemployment rate was at a robust 3.8% at the end of February, the coronavirus outbreak brought economic New York City, Jan 2020 uncertainty in March. In the last week of March alone, more than 3 Manufacturing million new unemployment claims were filed across the country. As 1.4% 3.3% nonessential businesses, such as restaurants, were ordered to close 4.3% Construction their facilities in New York, thousands of employees in the service Other Services industry are now out of work. The economic toll of the coronavirus has 18.0% 4.4% Information affected nearly all industries, with many small businesses being forced 5.3% Education to lay off thousands of workers. Following the massive increase in Leisure/Hospitality unemployment claims, the unemployment rate will increase not just on 9.6% Financial Activities a national level, but also in New York City, the nation’s leading hot spot 17.2% Government for the virus. 10.3% Trade/Transportation/Utilities At the end of the first quarter, the federal government passed a $2 Business & Professional trillion spending bill, providing economic relief to individuals, small 13.6% 12.6% Health businesses and other companies.

Source: New York State Department of Labor

UNEMPLOYMENT RATE PAYROLL EMPLOYMENT

Not Seasonally Adjusted Total Nonfarm, Not Seasonally Adjusted, 12-Month % Change

10% 6%

8% 5% 4% 6% 3% 4% 2% 2% 1%

0% 0% Feb-14 Feb-15 Feb-16 Feb-17 Feb-18 Feb-19 Feb-20 Feb-14 Feb-15 Feb-16 Feb-17 Feb-18 Feb-19 Feb-20

United States New York City United States New York City

Source: U.S. Bureau of Labor Statistics Source: U.S. Bureau of Labor Statistics

CONSUMER PRICE INDEX (CPI) EMPLOYMENT GROWTH BY INDUSTRY

All Items, 12-Month % Change, Not Seasonally Adjusted NYC, Jan 2020, 12-Month % Change, Not Seasonally Adj.

4% Total Health Care 3% Professional & Business Other Services 2% Government Information 1% Financial Activities Leisure/Hospitality 0% Education -1% Trade/Transportation/Utilities Feb-14 Feb-15 Feb-16 Feb-17 Feb-18 Feb-19 Feb-20 Mining and Construction Manufacturing United States New York City -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0%

Source: U.S. Bureau of Labor Statistics Source: New York State Department of Labor

JONATHAN MAZUR STEPHANIE JENNINGS ALISON BAUMANN STEPHEN TSAMBLAKOS Senior Managing Director Managing Director Associate Director, Research Senior Research Analyst 212.372.2154 212.372.2099 [email protected] [email protected] MICHAEL MICELI RONNIE WAGNER Associate Director, Research Director, Research

Newmark Knight Frank has implemented a proprietary database and our tracking methodology has been revised. With this expansion and refinement in our data, there may be adjustments in historical statistics including availability, asking rents, absorption and effective rents. Newmark Knight Frank Research Reports are available at www.ngkf.com/research

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