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Savills Studley Report New York City Office Sector Q4 2015

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Savills Studley Report New York City Office Sector Q4 2015 Savills Studley Research New York City Savills Studley Report New York City office sector Q4 2015 SUMMARY Market Highlights CLASS A AVAILABILITY RATE RISES IN posted a similar 2.1% quarter-on-quarter MIDTOWN decrease, with the rate falling to $64.33 to “Flight to quality. Downtown, the Jersey As expected, Manhattan's Class A availability end 2015. Waterfront and Long Island City are no longer rate reversed directions, rising by 0.6 pp stalking horses. Tenants are taking advantage to 12.3%. Midtown’s Class A rate rose by LEASING ACTIVITY GROWS of the lower rents and strong incentives in 1.2 pp to 11.8%, offsetting decreases of Fourth quarter leasing totaled 7.1 msf, 0.7 pp to 15.9% Downtown and 2.4 pp jumping from the third-quarter total of 6.6 these locations." Jeffrey Peck, Executive to 1.8% in Midtown South. Manhattan's msf and just below the market’s long-term Managing Director Class A rate is likely to register additional annual average. Even as more tenants are increases in 2016 as more big blocks priced out of Midtown South, deal volume “This has been a year of amazing change. with 2017 occupancy impact availability. was sustained during the quarter. Activity The flow of firms to Hudson Yards Downtown declined during the quarter, CLASS A RENTS FALL falling by 12.7%, but leasing in Midtown accelerated, intensifying the hollowing Class A asking rent in Midtown fell by 3.5% jumped to 4.5 msf as Hudson Yards out of office buildings in Midtown's core." completed another round of transactions. to $87.44. Downtown's Class A sector Bill Montana, Senior Managing Director Savills Studley Report | New York City The Westside and WeWork Office-Using Employment Trends A Disruptive Year in Manhattan’s Office Market Millions For quite some time now, there has been 1.40 4.0% no higher standard for office space in Manhattan than buildings in Midtown’s 1.35 2.0% core – from Broadway to Lexington Avenue. These buildings, within walking distance of 1.30 0.0% Penn Station and Grand Central, command by far the highest rents and loftiest sales 1.25 prices in the city. Retail, hospitality and -2.0% residential properties in the heart of Midtown 1.20 also sell for top dollar. As 2015 began, -4.0% 1.15 a 10,923-sf penthouse at One-57 was purchased for $100 million. In February, 2009 1.10 -6.0% Chinese insurance agency Anbang paid $1.95 billion ($1.38 million/unit) for the 2011 1.05 2006 2007 2008 2010 2012 2013 2014 2015 -8.0% Waldorf Astoria. Finally in May, Jeff Sutton NYC Off. Emp. NYC (% Annual Change) U.S.(% Annual Change) and General Growth Properties added to Source: Bureau of Labor Statistics their Fifth Avenue portfolio, acquiring the Crown Building for $1.78 billion ( $4,551/sf). Availability Rate Trends (All Classes) Midtown real estate remains one of the most (%) Overall Availability Rate Trends prized assets in the world, but 2015 could be seen as a tipping point for Midtown’s 20% office leasing market. Midtown is at risk of being knocked off its pedestal as a “must-have” location for office tenants. 14.9% The rapid pre-leasing of space in Hudson 15% Yards in 2015 was truly remarkable; some 11.8% 11.1% have characterized KKR’s purchase of the top 10 floors at 30 Hudson Yards and 10% 11.2% abandonment of the top floors at 9 W. 57th 10.9% Steet as a “culture change.” At the very 8.4% least, KKR’s move is further proof that the Plaza District is losing some of its aura as 5% the exclusive choice for private equity firms. Such changes have been years in the Midtown Midtown South Downtown making. Hudson Yards’ recent success is 0% the culmination of several years of extensive 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 relocation activity among tenants. Demand is dispersing across Manhattan and the metro region as tenants tap into options all Asking Rent Trends (All Classes) over the island, and a few move to Northern Overall Rental Rate Trends New Jersey or the Outer Boroughs. As the ($/sf) center of gravity in the office sector is pulled in multiple directions, a long list of buildings $78.22 in Midtown’s core must rethink their leasing $80 $70.12 strategy and reposition accordingly. $70.31 New Industry Concentrations, $60 $65.72 New Cities $60.64 Changing industry preferences and needs $52.27 have fueled much of the movement. $40 Midtown South and Lower Manhattan each witnessed pivotal early sales and leases that set the stage for the more extensive industry relocation activity that followed. Google’s $20 purchase of 111 Eighth Avenue in 2010 and its prolific expansion since then provided Midtown Midtown South Downtown much of the impetus for Midtown South’s $0 emergence as the nucleus of Manhattan’s 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 tech and creative sector. Tenants unable 02 Q4 2015 to find or afford space in Silicon Alley have looked to Penn Plaza, Lower Manhattan, Availability Rate Comparison Rental Rate Comparison Brooklyn and Queens. Few have moved Availability Rate Comparison to Midtown. A resurgent Lower Manhattan Downtown II 2.6% Plaza I $96.11 has become the new heart of the publishing Midtown South I 7.3% Westside I $92.75 and advertising sector. Condé Nast’s 1.0- Plaza II 7.6% Plaza II $85.46 msf lease at One World Trade Center in Grand Central II Midtown $78.22 2011 was well out in front of an influx of 8.2% media, publishing and advertising firms. Midtown South 8.4% Midtown South II $74.18 The hollowing-out of Midtown buildings Plaza I 9.0% New York City $72.91 intensified in 2013 and 2014 as law firms Westside II 9.1% Grand Central I $72.34 and retailers flocked to Brookfield Place, and New York City 10.6% Downtown II $70.66 has continued with deals by The Associated Midtown 10.9% Midtown South $70.31 Press and SNY. Downtown 11.1% Midtown South I $69.00 Westside II $67.74 Hudson Yards’ success has been less Midtown South II 11.3% Downtown industry-specific. Although the development Westside I 11.8% $60.64 Downtown I was once considered too far afield, a broad Downtown I 13.1% $59.89 Grand Central II cross-section of Midtown’s traditional Grand Central I 15.0% $56.57 US Index tenants – law firms, consultants, retailers US Index 17.0% $32.40 and private equity companies – have flocked ($/sf) $0 $20 $40 $60 $80 $100 (%) 0% 5% 10% 15% 20% to Hudson Yards. Amazing amenities and architecture, access to the High Line, new retail and residential product, fantastic views and the extension of the 7 subway line – in Major Transactions short, the emergence of a new city – have Tenant Sq Feet Address Market Area helped businesses overcome hesitancy + Wells Fargo 500,000 30 Hudson Yards Westside II about the Far Westside. The first three + KKR 343,000 30 Hudson Yards Westside II buildings underway at Hudson Yards are nearly 75.0% pre-leased. Morgan Stanley** 260,829 1633 Broadway Westside II Google 250,000 Pier 57 Midtown South I WeWork on Every Corner Boston Consulting Group 193,295 10 Hudson Yards Westside II The geographical diffusion of mega-tenants Teachers' Retirement System** 191,138 55 Water St Downtown I across Manhattan has been matched by The Associated Press 172,352 200 Liberty St Downtown I a fragmentation in its tenant base – much Indeed, Inc. 125,000 1120 Ave of the Americas Westside I of the growth across the market has come Gensler 119,414 1700 Broadway Westside II from start-ups and small firms. WeWork WeWork 109,631 300 Park Ave Grand Central I has emerged as the front runner in the Sum of Top Leases 2,264,659 Sum of 4th Quarter Leasing Activity 7.1 MSF crowded shared workspace arena. It leased + Sale *Renewal ** Renewal&Expansion almost 700,000 sf in 2015 and now has nearly 25 outposts spread across New York clearly preferred to be in the heart of Hudson they will have to compromise on quality. City. In addition to filling a lot of space, Yards or Brookfield Place. Some see the Crossing the Rivers WeWork saves some landlords from the other side of the street or avenue as being headache of chopping up space into small a bit too remote. Landlords leasing space in In addition to the movement within units, marketing it to micro-tenants and the developments clustered around Hudson Manhattan, more tenants are joining the managing their needs. Other landlords Yards and in Lower Manhattan (Manhattan flow of companies to Brooklyn, Queens and are leasing lower floors to retail tenants, West, Two World Trade Center and 28 Northern New Jersey that began a couple schools and medical users. In a different Liberty Street) are banking on another wave of years ago. Generous landlord incentives market (San Francisco) or a different time of leasing. So far, however, pre-leasing in coupled with extensive tax credits can push (2007) landlords would have recaptured these “edge properties” has been tentative effective rents below $20.00/sf for Class A some of this space. Today, more realize and the pool of 250,000-sf-plus tenants space in Jersey City and Hoboken. While that diversification of their tenant base seeking space is quite shallow. Northern New Jersey has ample existing will help them hedge against contracting buildings that can accommodate corporate demand for office space.
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