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Manhattan Office Market Q1 2020 Topics and Trends

While remains a premier For the commercial real estate market global investment market, its segment, this crisis will have both performance in the year ending Q1 short-term impacts that are now 2020 indicates that sales volume in the becoming obvious. It will also have Class A and B office market is down long-term impacts that will unfold considerably compared to recent years over time. and fundamentals are currently being Short Term Impact heavily watched as the current COVID- 19 crisis develops. Total dollar volume Due to the nature of COVID-19, the in the year ending Q1 2020 is down state of , along with most 42% from year ending Q1 2016 with other states, mandated a lockdown decreases seen year over year. This that encourages all people to stay report analyzes the trends in market home. Businesses have been classified fundamentals and investment sales in as either non-essential, in which case the Manhattan Class A and B office the business must close, or essential, in market, including the Midtown, which case it can stay open. Even the Midtown South, and Downtown construction industry has been submarkets. shuttered.

FEATURE: COVID-19 and its Impact Closures have displaced thousands of on the Market workers. With business closures, and with thousands unemployed or In Mid-March 2020, the Global COVID- furloughed, there is an immediate 19 Pandemic brought much of the concern about how tenants will be world and to a halt. The able to continue paying rent. spread of the virus was so rapid, that nations, states and local municipalities Long Term Impact were forced to take drastic measures. The impact of COVID-19 on In addition to the health risk itself, commercial real estate is going to there is ongoing societal angst with unfold over time. With most non- most US citizens living under state essential workers growing accustomed mandated lockdown orders. Further to working from home full time, there impacting the economy is that the are questions surrounding the need lockdown orders involve closing down for traditional office space once businesses that are considered non- businesses re-open. Most likely, the essential. ideas of co-working space and open floor plans that were growing pre- pandemic, will dissipate.

Empire State Building, 350 , Suite 4320, New York, NY 10118 212.425.4300 marshall-stevens.com

Asking Rents and Vacancy Rates $70.00/fs 10.0%

$65.00/fs 9.5% MARKET FUNDAMENTALS: Average Asking Rents & Vacancy $60.00/fs 9.0% Prior to the pandemic, fundamentals were $55.00/fs healthy. Between Q1 2011 and Q1 2020, vacancy 8.5%

$50.00/fs Vacancy RatesOffice rates fluctuated between a low of 8.0% (Q1 Office Asking Rents Office 8.0% 2019) and a high of 9.4% (Q1 2014). Over the $45.00/fs past year, vacancy rates increased nominally. $40.00/fs 7.5% Asking rents were increasing relatively Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 consistently up until the most recent quarter, Asking Rent Vacancy Rate ranging from $47.36 per square foot (Q1 2011)

Total Net Absorption to $64.11 per square foot (Q1 2019), but 4,000,000 decreasing slightly in Q1 2020. If the pandemic

3,000,000 causes an extended dip in demand, vacancies will likely rise, and rents will flatten or decline. 2,000,000 We are likely heading into a tenant’s market. 1,000,000

Square FeetSquare 0 Net Absorption and Leasing Activity

-1,000,000 Total net absorption in the Manhattan market -2,000,000 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 has been relatively low since the end of 2019 but 2016 2016 2016 2017 2017 2017 2017 2018 2018 2018 2018 2019 2019 2019 2019 2020 is trending upwards, indicating a potential Total Net Absorption 4-year Average increase in net absorption. Total square feet leased has fluctuated recently but Q1 2020 Total SF Leased 16,000,000 shows a significant drop from the leasing activity 14,000,000 seen in 2018 and 2019. It is expected that 12,000,000 COVID-19 will cause a lag in leasing activity as 10,000,000 building tours are cancelled and employees 8,000,000

6,000,000 grow accustomed to working from home, Square FeetSquare 4,000,000 limiting the demand for traditional space. 2,000,000 0 Space Addition Activity Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2016 2016 2016 2017 2017 2017 2017 2018 2018 2018 2018 2019 2019 2019 2019 2020 There is still a fairly large amount of space under Total SF Leased 4-year Average construction that is waiting to be delivered, Space Additions indicating an active construction pipeline prior 25,000,000 to the pandemic outbreak. With increased transit connectivity, tenants have shifted their 20,000,000 focus from just the Midtown core and are now 15,000,000 open to different areas of the metro, like

10,000,000 Hudson Yards. Although currently halted, Square Feet Square construction activity is expected to resume as 5,000,000 developers recognize the shifting focus from the 0 midtown core and meet the demands of the Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2016 2016 2016 2017 2017 2017 2017 2018 2018 2018 2018 2019 2019 2019 2019 2020 tenants in new areas. SF Delivered SF Under Construction

Empire State Building, 350 Fifth Avenue, Suite 4320, New York, NY 10118 212.425.4300 marshall-stevens.com

SALES (5 YEAR TREND): Volume MANHATTAN OFFICE BUILDING DOLLAR VOLUME

$25,000,000,000 Total dollar volume for investment sales of Class

$20,000,000,000 A and B office buildings in Manhattan has been decreasing year over year since the beginning of $15,000,000,000 the analysis period. Since 2016, when a surge of $10,000,000,000 Chinese investment capital flowed into the metro, there has been a significant decrease in $5,000,000,000 total dollar volume, down to $12.3 billion in $0 2019 compared to $21.2 billion in 2016. The FYE Q1 FYE Q1 FYE Q1 FYE Q1 FYE Q1 2016 2017 2018 2019 2020 2020 results are 42% lower than 2016 but on par Dollar Volume with 2019.

Average Pricing Per SF MANHATTAN OFFICE BUILDING AVERAGE $/SF $751.34 There was a significant increase in average $800 $749.27 $700 $664.13 pricing in the last year. The average as of 2020 $593.63 was $749.27 per square foot, which is a 13% $600 $527.28 $500 increase compared to the pricing seen in 2019. $400 Market participants will be watching this metric $300 carefully for the remainder of 2020. $200 $100 Capitalization Rates $0 FYE Q1 FYE Q1 FYE Q1 FYE Q1 FYE Q1 2016 2017 2018 2019 2020 The average cap rate for Class A and B office Average $/SF buildings in Manhattan decreased slightly in the

last year. As of a Q1 2020 report, PwC placed MANHATTAN OFFICE BUILDING AVERAGE CAP RATE this market in expansion through 2020, moving 6.00% into contraction for 2021 and recession for 2022 5.05% 4.93% and 2023; however, this timeline has already 5.00% 4.38% 4.10% 3.93% been shifted due to COVID-19. Deal making is at 4.00% a standstill due to COVID-19; however, landlords

3.00% may choose to wait before they drop their asking prices, which means cap rates and pricing 2.00% FYE Q1 FYE Q1 FYE Q1 FYE Q1 FYE Q1 could remain stable in the short term. 2016 2017 2018 2019 2020 Average Cap Rate

SOURCE: CoStar and Marshall & Stevens

Patrick T. Craig, MAI, MRICS Emily Ferreira Jacob Scott Executive Managing Director Senior Associate Analyst Real Estate Valuation Practice Real Estate Valuation Practice Real Estate Valuation Practice 212.897.9481 646.438.7605 646.438.7606 [email protected] [email protected] [email protected]

Empire State Building, 350 Fifth Avenue, Suite 4320, New York, NY 10118 212.425.4300 marshall-stevens.com

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