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Savills Studley Report office sector Q2 2018

SUMMARY

Market Highlights

AVAILABILITY RATE HOLDS STEADY in Class A rent. "Even as WeWork and other shared office ’s overall availability rate was LEASING SPIKES providers absorb commodity space, many unchanged, remaining at 11.7%. The Class landlords are still saddled with space on Leasing volume totaled 10 million square A availability rate fell by 50 basis points to lower floors. The only way to lease these less 12.7% but this was balanced out by a 50 feet (msf) in the second quarter, as five appealing floors in a competitive market is to basis point increase in the Class B and C leases over 300,000 sf were completed. be aggressive with pricing." availability rate to 10.8%. Bill Montana, Senior Managing Director RENT FLAT INVESTMENT SALES RISE "Coworking space has surprised nearly Manhattan’s average asking rent ticked Based on office property sales during the everyone. The proliferation of shared office down from $73.88 to $73.85 during the first half of the year, 2018 is on track to space has been impressive. Its current pace of second quarter. Rent has declined by 1.4% exceed transaction activity during 2017. expansion is unsustainable, though. At some compared to mid-year 2017. Midtown's Investment sales soared to just over $9 point, even without the test of a recession, this Class A average rent increased by 1.2% to billion, compared to the previous six month sector will reach a saturation point, spurring $89.38, but Midtown South (down by 2.1% total of $6.7 billion. some retrenchment." to $108.70) and Downtown (down by 2.1% to $68.26), both posted quarterly decreases Joe Genovesi, Executive Managing Director Savills Studley Report | New York City

Coworking the new Telework? Office-Using Employment Trends In the early days of the internet, back when modem dial-ins were audible, you could also Millions hear a lot of predictions that time was running 1.60 6% out for traditional office space. Businesses and their employees would surely opt to work from 1.40 4% home. For a while, some of the largest U.S. businesses implemented teleworking. Over the 1.20 2% last five to six years, though, many of these 1.00 0% firms have ended their experimentation with teleworking – including Honeywell, Yahoo, HP 0.80 -2% and IBM. They have clearly concluded that a base of operations reinforcing company culture 0.60 -4% and fostering collaboration is essential to 0.40 -6% succeeding in an innovation economy.

0.20 -8% Coworking is the new teleworking, the latest 2011 2013 2014 2015 2016 2017 2018 2009 2010 2012 candidate to displace traditional office space. 0.00 -10% NYC Off. Emp. NYC (% Annual Change) U.S.(% Annual Change) Not that long ago the consensus view was that Source: Bureau of Labor Statistics coworking would be a short-lived craze. The onslaught of WeWork and rise of newer models such as Industrious, Knotel and Innovate Availability Rate Trends (All Classes) have changed that perspective. Coworking Overall Availability Rate Trends is exceeding most people’s expectations, influencing landlords in nearly all major markets. Estimates that shared space will some day take 15% over 30% or perhaps half of the traditional office 14.5% market have swung too far in the other direction. 12.6% Shared office space will have a more lasting 11.4% impact on the workplace than teleworking, but 11.3% it will not supplant conventional leasing any time 10% 9.5% soon.

8.7% Shared office space is not the best option for most established businesses. On a per desk 5% basis, the cost is much higher. Nevertheless, shared office providers are offering distinctive cultures and a suite of services to their members. WeWork, for example, has deployed Midtown Midtown South Downtown some of its funds to acquire software and 0% services that it offers to members. In 2017 it Q2 '17 Q3 '17 Q4 '17 Q1 '18 Q2 '18 acquired coding academy Flatiron School. It recently started a Services Store, offering members discounted subscriptions to Adobe, Asking Rent Trends (All Classes) ($/sf) Lyft, Slack and Uplift. This blending of learning Overall Rental Rate Trends opportunities and “grab and go” IT solutions is ideal for micropreneurs or small businesses. $100 Shared office space providers have transformed $80.00 $78.52 the level of services offered to small businesses $80 and individual members, but they will never $78.29 be as tailored as the internal support within $72.80 a company. Established firms have internal $60 $64.44 support teams performing roles in a more $63.56 efficient and cost effective manner that aligns intimately with the core company mission. $40 Don't Overestimate the Upside

$20 Coworking space is ideal for businesses that are highly uncertain about their space and staff Midtown Midtown South Downtown requirements a year or two out – providing $0 the flexibility to scale up or down as needed. Q2 '17 Q3 '17 Q4 '17 Q1 '18 Q2 '18 Demand from established businesses requiring

02 Q2 2018

an entry point to a market or swing space supports enterprise coworking. WeWork has Availability Rate Comparison Rental Rate Comparison ($/sf) City Hall made headway capturing some significant 5.9% Hudson Yards $108.32 leases from the likes of IBM, Amazon and Park Ave S./Madison Square 7.3% Plaza North $99.09 Flatiron 7.7% $94.05 MercedesBenz, but the jury is still out on how Greenwich Village 8.3% Soho $91.85 much the enterprise business or other models Union Square 8.4% Plaza South $82.78 like Knotel will encroach on traditional leasing. Midtown South 9.5% $79.10 Times Square 10.0% Union Square $78.75 10.5% Midtown South $78.52 Fractional office space providers align with Penn Plaza/TSQ South 10.5% Midtown $78.29 only a fraction of the market, but it is a rapidly Chelsea 10.9% Chelsea $78.24 growing portion that has the attention of some Grand Central 11.1% Columbus Circle $75.37 Midtown 11.4% $74.20 investors. The amount of coworking space Manhattan 11.7% Manhattan $73.85 in Manhattan will likely approach 8.0 msf or Plaza South 11.9% Grand Central $73.46 roughly 2% of existing office stock by year-end Hudson Yards 12.6% $71.06 Financial District 12.6% WTC/Brookfield Place $68.88 2018 – as a percentage of office-using workers, Tribeca 14.4% Park Ave S./Madison Square $68.85 though, shared office space probably only Soho 14.5% Flatiron $65.12 accounts for 1% to 1.5% of office workers. Downtown 14.5% /UN $64.54 Plaza North More than 1.0 million people in Manhattan 14.6% Penn Plaza/TSQ South $64.40 Hudson Square 15.7% Downtown $63.56 work in offices; estimating how many are using U.S. Index 17.9% Financial District $57.77 shared office space is a challenge. The industry WTC/Brookfield Place 18.2% City Hall $53.13 lacks a reliable statistic such as average East Side/UN 19.8% U.S. Index $34.06 daily occupancy rates. WeWork has quoted 0% 5% 10% 15% 20% 25% $0 $15 $30 $45 $60 $75 $90 $105 $120 occupancy of 90% and has a waiting list at some facilities. Considering that Manhattan comprises about 20% of the company's global Major Transactions footprint, it may hit its upper limit here before it Tenant Sq Feet Address Market Area does elsewhere. Pfizer 800,000 66 Hudson Blvd Hudson Yards Latham & Watkins 407,000 1271 Avenue of the Americas Columbus Circle Bailout for Commodity Space Discovery Inc. 360,000 230 Park Ave S Union Square J. Crew 346,607 225 Liberty St WTC/Brookfield Place Although it is a small portion of office occupancy Facebook^^ 320,000 770 Greenwich Village in Manhattan, coworking nevertheless has made First Republic Bank** 180,000 1230 Avenue of the Americas Plaza II the difference between negative and positive NYU Langone Medical Center^^ 150,000 One Park Ave South absorption in the last several quarters. Since Touro College 144,000 320 W 31st St Penn Plaza/Times Square South the start of 2017, net absorption in Manhattan Blank Rome 138,000 1271 Avenue of the Americas Columbus Circle has totaled just over 3.0 msf – coworking firms McGraw Hill Education 136,000 1325 Avenue of the Americas Columbus Circle have leased at least 2.7 msf in this same period. Sum of Top Leases 2,981,607 Sum of 2nd Quarter Leasing Activity 10 MSF *Renewal Without the several msf leased by WeWork **Renewal & Expansion and a long list of other providers in the last few ^^Expansion years, availability would be at least another 100 rising supply. Activity in newly constructed or Future Fallout? basis points higher, approaching 13%, and the reconstituted prime buildings with extensive Coworking has bailed out some landlords. highest mark since the recession. Additionally, amenities and efficient layouts has been strong, What would happen, though, if there was a shared office space providers have become but landlords have to be aggressive to lease major reversal in the economy, a dropoff in the core tenants for lower floors; they have commodity space. membership and the closure of a high number been the ultimate commodity space bailout. of centers? The top coworking firms are An analysis of 6.2 msf of coworking space in Even as office employment is growing, many receiving hefty improvement allowances and Manhattan found that 59% of the space they employers are shrinking their footprint. The bulk coworking buildouts are not easily transferable occupy (3.6 msf) was on base floors (10th floor of this densification may be over, but examples back to a vanilla shell. As long as coworking or below).Without these leases, many landlords of still take place nearly every quarter. Deutsche providers stay for two to three years, landlords would have been saddled with lower floors Bank, for example, is close to signing a 1.1-msf will recoup their investment. that can rarely command a premium. Buildings at One Columbus, but it will eventually vacate without the luck to ride the wave of coworking, 1.66 msf at 60 Wall Street. AllianceBernstein Like other new innovations the ultimate market particularly those with big blocks of commodity Holding LP made its headquarters move from share of shared office space is not known, but space, have to be aggressive. As of mid-year, Manhattan to downtown Nashville official. this growth path seems unsustainable. Even 19.2 msf of the 50.1 msf available space was Manhattan is expected to lose at least several without a recession, coworking will reach a contained below the 10th floor. hundred positions while Music City gains 1,000. saturation point in the next several years, forcing The firm leases nearly 1.0 msf at 1345 Avenue of some level of retrenchment in the footprint Banks Continue Efficiency Push Americas. Additionally, automation anxiety, the of these trailblazers. The negative impact of fear that AI and robotics will eliminate thousands any such pullback in the coworking space The rise of coworking coincides with the effort of jobs, has real relevance for the banking should be containable - unless of course, it is by landlords in most markets to differentiate sector. Citigroup recently said that it could cut a trigger event highlighting the fragility of other their assets. This campaign is particularly up to 10,000 technology and operations staff in companies that are chasing the next big thing. intense in Midtown and where the next five years due to automation. choppy demand is struggling to keep up with

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Leasing Available Availability Asking Rents Map Submarket Total Activity SF Rate Per SF*

% pp % SF This Change Year This Change Year This Change Year This Quarter (1000's) Quarter from Ago Quarter from Ago Quarter from Ago Last Qtr. Last Qtr. (1) Last Qtr. Columbus Circle 27,548 825 2,885 -13.9% 2,774 10.5% -1.7% 9.4% $75.37 -0.9% $76.47 1 Columbus Circle - Class A 19,453 769 1,811 -21.1% 2,008 9.3% -2.5% 10.1% $82.25 3.1% $79.55 Times Square 32,586 326 3,245 7.4% 2,728 10.0% 0.7% 7.7% $79.10 -2.1% $77.26 2 Times Square - Class A 28,190 268 2,629 13.5% 2,030 9.3% 1.1% 6.6% $84.65 -3.8% $84.19 Hudson Yards 7,413 855 932 -5.6% 706 12.6% -0.8% 17.1% $108.32 4.1% $91.48 3 Hudson Yards - Class A 6,106 825 897 -0.8% 484 14.7% -0.1% 17.2% $109.99 0.0% $100.53 Penn Plaza/Times Square South 54,247 1,165 5,684 3.8% 5,140 10.5% 0.4% 9.1% $64.40 4.6% $63.73 4 Penn Plaza/Times Square South - Class A 8,068 134 780 5.3% 835 9.7% 0.5% 9.9% $84.46 2.5% $90.05 Plaza North 28,593 233 4,174 4.4% 4,353 14.6% 0.6% 14.6% $99.09 0.1% $99.67 5 Plaza North - Class A 22,080 206 3,605 5.0% 3,814 16.3% 0.8% 16.6% $103.85 0.2% $104.28 Plaza South 42,065 1,232 5,021 -9.6% 6,009 11.9% -1.3% 13.7% $82.78 2.8% $87.95 6 Plaza South - Class A 36,987 1,188 4,112 -13.9% 5,420 11.1% -1.8% 14.0% $86.38 4.4% $89.84 Grand Central 66,999 1,102 7,467 -1.6% 9,255 11.1% -0.2% 12.7% $73.46 3.7% $73.18 7 Grand Central - Class A 36,776 614 3,789 -6.5% 5,752 10.3% -0.7% 14.4% $83.44 7.7% $80.28 East Side/UN 3,005 4 595 -0.8% 54 19.8% -0.2% 0.9% $64.54 -9.6% $62.53 8 East Side/UN - Class A 783 0 166 0.0% 1 21.2% 0.0% 0.2% N/A N/A N/A 9 Chelsea 16,842 257 1,834 -5.3% 1,930 10.9% -0.6% 10.8% $78.24 -1.8% $69.97 Chelsea - Class A 1,051 27 390 -21.5% 376 37.1% -10.2% 34.8% $134.07 1.7% N/A 10 Flatiron 13,346 357 1,022 13.1% 1,153 7.7% 0.9% 8.2% $65.12 -4.4% $65.39 Flatiron - Class A 858 N/A 58 0.0% N/A 6.7% 0.0% 0.0% $80.00 N/A N/A 11 Park Ave South/Madison Square 23,300 361 1,695 8.2% 1,747 7.3% 0.5% 7.1% $68.85 -0.4% $67.43 Park Ave South/Madison Sq. - Class A 3,413 N/A N/A 0.0% 40 N/A N/A 1.1% $98.00 N/A N/A Union Square 7,575 738 636 -8.5% 613 8.4% -0.8% 8.0% $78.75 3.6% $73.90 12 Union Square - Class A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A Greenwich Village 7,234 384 604 -12.8% 499 8.3% -1.2% 5.9% $94.05 4.0% $76.12 13 Greenwich Village - Class A 935 7 169 -1.4% 72 18.1% -0.2% 8.6% $147.78 N/A N/A 14 Hudson Square 8,494 250 1,332 -12.6% 1,006 15.7% -2.3% 9.9% $74.20 0.0% $81.01 Hudson Square - Class A 2,065 106 401 0.0% 248 19.4% -3.4% 0.0% $73.25 -3.4% N/A 15 Soho 4,235 157 612 -4.1% 704 14.5% -0.6% 14.5% $91.85 3.1% $76.91 Soho - Class A 238 N/A N/A N/A N/A 46.6% 0.0% 46.6% $107.79 -0.2% $116.65 16 Tribeca 4,905 5 707 66.1% 604 14.4% 5.7% 9.9% $71.06 2.9% $75.53 Tribeca - 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 3,862 168 227 -17.9% 297 5.9% -1.3% 7.3% $53.13 -0.6% $54.95 City 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 32,857 909 5,965 5.4% 5,917 18.2% 0.9% 17.2% $68.88 -3.8% $70.68 WTC/Brookfield Place - Class A 21,821 761 4,090 -0.5% 4,491 18.7% -0.1% 20.6% $74.07 -3.1% $75.88 19 Financial District 47,566 666 6,009 2.5% 5,025 12.6% 0.3% 10.1% $57.77 -0.7% $57.15 Financial District- Class A 21,938 460 3,562 -3.7% 3,270 16.2% -0.6% 14.7% $61.72 -0.8% $60.99 1-8 Midtown 262,455 5,741 30,002 -1.9% 31,327 11.4% -0.2% 11.3% $78.29 1.3% $80.00 Midtown - Class A 158,442 4,004 17,790 -4.8% 20,869 11.2% -0.6% 12.4% $89.38 1.2% $88.18 Midtown South Total 81,026 2,504 7,735 -2.8% 7,177 9.5% -0.3% 8.7% $78.52 0.1% $72.80 9-15 Midtown South - Class A 8,559 140 1,228 -6.2% 573 14.4% -0.9% 7.2% $108.70 -2.1% $120.28 Downtown Total 89,189 1,747 12,909 5.6% 11,835 14.5% 0.8% 12.6% $63.56 -2.4% $64.44 16-19 Downtown Total - Class A 43,759 1,221 7,653 -2.0% 7,761 17.5% -0.4% 17.3% $68.26 -2.1% $69.20 Manhattan Total 432,671 9,993 50,646 -0.2% 50,526 11.7% 0.0% 11.1% $73.85 0.0% $74.88 Manhattan Total - Class A 210,760 5,366 26,672 -4.1% 28,925 12.7% -0.5% 13.3% $83.30 0.3% $83.45

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Savills Studley Chairman & CEO Corporate Research Contacts Mitchell S. Steir Keith DeCoster - Director, U.S. Analytics 11th Floor [email protected] [email protected] New York, NY 10022 (212) 326-1000 (212) 326-1000 Lesley Kamnitzer - Research Manager [email protected]

*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

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