MANHATTAN OFFICE MARKET

Market Analysis Office Landscape Stands Steady Second Quarter 2018

Contacts

Jeff Adler Vice President & General Manager of Yardi Matrix [email protected] (800) 866-1124 x2403

Jack Kern Director of Research and Publications [email protected] (800) 866-1124 x2444

Chris Nebenzahl Senior Analyst [email protected] (800) 866-1124 x2200

Veronica Grecu Senior Real Estate Market Analyst [email protected] (306) 955-1855 x7583 Manhattan remains one of the most dynamic office markets in the Author U.S., with a growing and diversified economy. At the same time, Corina Ștef Associate Editor Manhattan’s office market continues to evolve to accommodate new [email protected] developments and an increase in tenants in the media and technology industries.

Some 93,400 jobs were added year-over-year in March, led by 48,200 Aggregated and anonymized new jobs in Education and Health Services and 18,400 new jobs related expense and lease expiration to Professional and Business Services. Rejuvenated and emerging data is available to Yardi Matrix submarkets were a magnet for office tenants with a young workforce. subscribers. Please contact us Submarkets such as Midtown South and Chelsea are adding firms in for details! the TAMI (technology, advertising, media and information) industries, while some in the bedrock financial sector ponder a shift to Hudson Yards, where more than 9 million square feet is expected to come online over the next few quarters. BlackRock’s relocation from the For more information please contact: Plaza District—where vacancy reached 10.9% in April—to the Hudson

Ron Brock, Jr. Yards megadevelopment is evidence of the slow exodus and a symbol Industry Principal, Matrix of the changing office landscape. [email protected] Strong demand is producing healthy fundamentals, though rent (480) 663-1149 x2404 growth may be sparse going forward in some submarkets, as rents have reached cycle peaks and the first wave of the 20 million square feet that is under construction starts to come online.

Sales of office buildings are declining, as the past year saw around $12 billion in transactions.

Image by Eloi Omella/iSockphoto.com 1 Office-Using Employment

ECONOMIC SNAPSHOT

The strength of Manhattan’s recovery can be seen in the growth in office-using jobs, which reached nearly 2 million in March. Some 300,000 office-using jobs have been added since bottoming at 1.7 million during the last recession in 2009. The office-using sector equaled 28.6% of the metro’s total employment pool, considerably above the national share of 21.5%.

Source: Bureau of Labor Statistics (BLS). Data as of March 2018 Office-Using Employment

Office-Using Employment as a % of Total Employment 30.0%

28.0%

26.0%

24.0%

22.0%

20.0% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Manhattan Office-Using Employment National Office-Using Employment Source: Bureau of Labor Statistics (BLS). Data as of March 2018 Office-UsingSource: Bureau Employment of Labor Statistics (BLS). Data as of March 2018

Employment Growth by Sector as of March 2018 (Year-Over-Year)

Current Employment Year Change Code Employment Sector (000) % Share Employment % 65 EducationOffice-Using and Health ServicesEmployment as a % of1,486 Total Employment21.3% 48,200 3.4% 60 Professional and Business Services 1,128 16.1% 18,400 1.7% 30.0% 40 Trade, Transportation and Utilities 1,188 17.0% 13,500 1.1% 55 Financial28.0% Activities 623 8.9% 7,800 1.3% 15 Mining,26.0% Logging and Construction 257 3.7% 6,400 2.6% 70 Leisure and Hospitality 652 9.3% 2,000 0.3% 24.0% 80 Other Services 297 4.3% 1,200 0.4% 22.0% Source:50 BureauInformation of Labor Statistics (BLS). Data as of March 2018 245 3.5% 400 0.2% 30 Manufacturing20.0% 206 3.0% -1,900 -0.9% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 90 Government 907 13.0% -2,600 -0.3% Manhattan Office-Using Employment National Office-Using Employment Source: Bureau of Labor Statistics (BLS). Data as of March 2018 Source: Bureau of Labor Statistics (BLS). Data as of March 2018

Office-Using Employment as a % of Total Employment Employment Growth by Sector as of March 2018 (Year-Over-Year) 30.0%

28.0% Current Employment Year Change

Code26.0% Employment Sector (000) % Share Employment %

24.0%65 Education and Health Services 1,486 21.3% 48,200 3.4%

22.0%60 Professional and Business Services 1,128 16.1% 18,400 1.7%

20.0%40 Trade, Transportation and Utilities 1,188 17.0% 13,500 1.1% 55 Financial2007 Activities 2008 2009 2010 2011 2012 2013 2014 2015623 2016 2017 8.9% 2018 7,800 1.3% Manhattan Office-Using Employment National Office-Using Employment 15 Mining, Logging and Construction 257 3.7% 6,400 2.6% Source:70 Leisure Bureau of and Labor Hospitality Statistics (BLS). Data as of March 2018 652 9.3% 2,000 0.3% 80 Other Services 297 4.3% 1,200 0.4% Employment50 Information Growth by Sector as of March 2018 245 (Year-Over-Year) 3.5% 400 0.2% 30 Manufacturing Manhattan Office 206 Report | Second3.0% Quarter -1,9002018 2 -0.9% 90 Government Current 907 Employment 13.0% Year-2,600 Change -0.3% Code Employment Sector (000) % Share Employment % Source: Bureau of Labor Statistics (BLS). Data as of March 2018 65 Education and Health Services 1,486 21.3% 48,200 3.4% 60 Professional and Business Services 1,128 16.1% 18,400 1.7% 40 Trade, Transportation and Utilities 1,188 17.0% 13,500 1.1% 55 Financial Activities 623 8.9% 7,800 1.3% 15 Mining, Logging and Construction 257 3.7% 6,400 2.6% 70 Leisure and Hospitality 652 9.3% 2,000 0.3% 80 Other Services 297 4.3% 1,200 0.4% 50 Information 245 3.5% 400 0.2% 30 Manufacturing 206 3.0% -1,900 -0.9% 90 Government 907 13.0% -2,600 -0.3%

Source: Bureau of Labor Statistics (BLS). Data as of March 2018 Midtown Manhattan

LEASING | Vacancy

„„ Although the dynamics are slowly shifting, Midtown remains in high demand. The market’s vacancy was 9.5% in April, with roughly 17 million square feet available for lease, as many tenants opted for lease extensions or office consolidations. Vacancy for Class A properties was 9.9%, while vacancy for Class B properties measured 8.3% in April.

„„ Primary submarkets in the Central Business District (CBD) had an average vacancy rate of 9.6%, as absorption is tempered. The most sought-after submarkets are located in the urban–primary areas, where vacancies reached 2.3%.

„„ The supply-constrained United Nations– Turtle Bay submarket has the lowest vacancy rate at 5.2%, following Glencore’s move into 60,000 square feet at 330 Madison Ave. Murray Hill, although a predominantly residential submarket, had a vacancy rate of 8.1%, with nearly 2 million square feet of available space as of April.

„„ At 10.9%, the Plaza District had the highest vacancy rate in Midtown, with more than 11 million square feet of office space available as of April. Manhattan’s office landscape is shifting from the estab- lished financial core to emerging submar- kets, with lower leasing costs and highly amenitized neighborhoods. Avon relocated its corporate headquarters with about 400 employees into a 91,000-square-foot of- fice building in Lower Manhattan, leaving behind a considerable block of available space at 1251 Avenue of the Americas.

Manhattan Office Report | Second Quarter 2018 3 Midtown Manhattan

LEASING | Listings

„„ Nearly 5.5 million square feet of office space was listed as of April, at an average asking price of $86.60 per square foot for Class A properties and $61.12 per square foot for Class B office buildings.

„„ The Plaza District has the highest lease rate at $88.42 per square foot. The submarket continues to be the most sought-after area, as it houses the largest concentration of trophy assets. The area is also home to some of the country’s most prestigious investment and law firms, which can afford premium rents. Boasting the lowest vacancy rate in the market, United Nations - Turtle Bay followed with $73.48 per square foot.

„„ Times Square–Hell’s Kitchen emerged as the most affordable submarket, with average rents at $59.61 per square foot. Average rents in the Murray Hill submarket were $69.62 per square foot.

Major Tenants

„„ Midtown Manhattan tenants tend to opt for bigger leases. The market, dubbed as the largest central business district in the world, houses multiple corporate headquarters spreading across millions of square feet, such as Citigroup, Deutsche Bank, Time WarnerCable and Viacom. Bloomberg’s offices on Lexington Avenue remain one of the largest ones in the area, while a conglomerate of law firms including White & Case, Cravath, Swaine & Moore and Hogan Lovell occupy mammoth-size portions of office space in trophy towers. The market is also home to many foreign businesses, such as Nomura Research Institute, which leases more than 800,000 square feet in Time’s Square–Hell’s Kitchen.

Manhattan Office Report | Second Quarter 2018 4 Midtown Manhattan

SUPPLY

„„ Roughly 900,000 square feet of space has been added to the market since 2014, with construction concentrated in the Times Square–Hell’s Kitchen and Plaza District submarkets. Although development was slow between 2014 and 2017, more than 1 million square feet of space is expected to come online by the end of this year.

„„ Seven properties totaling 5.5 million square feet were under construction in Midtown Manhattan as of April. Development is the strongest in the Plaza District submarket, where 3.5 million square feet of office space is underway. The submarket’s largest project is SL Green Realty’s 1.7 million-square-foot One Vanderbilt, which is slated for completion in 2020.

„„ Almost 7.5 million square feet is in preconstruction stages.

Manhattan Office Report | Second Quarter 2018 5 Midtown Manhattan

INVESTMENT TRANSACTIONS

„„ Midtown remains the borough’s most active submarket, as investors are drawn to its high- caliber office assets. In the 12 months through April, 8.4 million square feet was traded for a combined $7 billion.

„„ The Times Square–Hell’s Kitchen submarket was the most active area within Midtown, with more than 4.5 million square feet sold for $3 billion. The more expensive Plaza District followed with 2.8 million square feet sold for the same amount. Two buildings totaling roughly 728,000 square feet traded for a combined $514 million in the United Nations–Turtle Bay submarket, while only one asset encompassing 302,240 square feet changed hands in Murray Hill, in a $316 million deal.

„„ Office properties completed in the 1960s led transaction volume in the market during the past four years, with more than 7 million square feet of space sold for $6.3 billion. Circa-1980s properties encompassing 6.8 million square feet saw $6.4 billion in sales.

„„ As foreign capital continues to be injected into the market, Chinese conglomerate HNA Group emerged as Midtown Manhattan’s top buyer in the 12 months ending in April. The company paid $2.2 billion for 245 Park Ave., a 1966-built office property in the Plaza District. The 45-story asset totals 1.8 million square feet and was sold by Brookfield Properties.

„„ New York REIT acquired a 49.9% inter- est from George Comfort & Sons in the 2 million-square-foot Worldwide Plaza for $686 million in June. Four months later, SL Green paid $840 million for a 48.7% ownership stake in the 49-story office tower.

Manhattan Office Report | Second Quarter 2018 6 Midtown South

LEASING | Vacancy

„„ The vacancy rate in Midtown South was 6.9% as of April. Financial firms continue to ink large leases in all asset classes in order to be close to tech tenants that have come to dominate the market. As high-quality space in the market is scarce, Class A office assets had the lowest average vacancy rate at 6.1%. Class B properties had a higher vacancy rate of 7.4%.

„„ Vacancy was highest in the urban–primary submarkets (6.9%), followed by the CBD- primary areas (6.6%).

„„ Office vacancies in Gramercy Park measured 5.8% in April, driven by the submarket’s reduced available office inventory and affordable lease rates. Financial companies such as Credit Suisse and JP Morgan Chase have renewed or expanded leases in this area.

„„ Chelsea’s vacancy rate was 6.5%. Fragomen, Del Rey, Bernsen & Loewy relocated into the area in September 2017, taking up 108,000 square feet at 1400 Broadway.

„„ Soho, a former industrial district that now fosters an art-oriented business climate, ranked at the other end of the spectrum, with a vacancy rate of 14.2%. Cetra- Ruddy’s headquarters relocation from 584 Broadway was a contributing factor.

„„ Hudson Square’s soaring rental prices pushed vacancy rates to 8.5%. Some businesses from the TAMI sector, such as Momentum Worldwide, have relocated to the submarket for less expensive space. Momentum left a significant block of space vacant at 250 Hudson St. and moved its headquarters into 60,000 square feet of space at 300 Vesey St. in Lower Manhattan.

Manhattan Office Report | Second Quarter 2018 7 Midtown South

LEASING | Listings

„„ Some 2.4 million square feet of office space was listed in Midtown South as of April. The listings fall predominantly into the Class B category, as three out of six submarkets lack premier office assets. The average asking price reached $82.71 per square foot for Class A office space, and $73.91 for Class B properties.

„„ A vibrant center for media businesses, Hudson Square was the most expensive submarket, with an average asking price of $99.52 per square foot. MAC Cosmetics filled in 86,524 square feet of space at 233 Spring St. in one of the most expensive leases in Manhattan.

„„ Asking prices were the second-highest in East Village ($79.77 per square foot), driven by tight vacancies and limited office supply. The highly retail and nighlife-oriented submarket’s zoning plan doesn’t stimulate office development, and the rents are unlikely to change anytime soon.

„„ At the opposite end is Chelsea, where the average price per square foot was $65.57. The submarket has a large amount of leas- able office space, as well as more than 10 million square feet of much-needed premier office space that is set for delivery in the coming quarters. The emerging Hudson Yards redevelopment will be the largest pri- vate real estate project in the nation, allow- ing a large number of corporate tenants to move next to the Hudson River bank.

Major Tenants

„„ Tech companies, financial and aset management firms dominate the Midtown South tenant landscape. Companies such as Alliance Bernstein, Credit Suisse, JPMorgan Chase, UBS and BlackRock are some of the area’s largest tenants. Google, Amazon and Time Warner follow behind with half-million-square-foot leases.

Manhattan Office Report | Second Quarter 2018 8 Midtown South

SUPPLY

„„ Nearly 2.8 million square feet of office space was added to the market during the past four years. In 2014 and 2015, construction activity was steady, and six properties totaling a combined 850,000 square feet came online. The following year saw a remarkable growth in development, as two office properties totaling 1.9 million square feet were added to the inventory. More than 2 million square feet of space is expected to come online by the end of 2018.

„„ Roughly 11 million square feet of office space across 15 properties was under construction as of April, accounting for 57.5% of the pipeline. Another 8 million square feet was in preconstruction stages.

„„ Development activity is concentrated in Chelsea, accounting for 32.2% of the total stock. The submarket will be home to Midtown South’s largest upcoming office buildings, such as Mitsui Fudosan’s 2.9 million-square-foot 50 Hudson Yards tower that’s set for completion in January 2022.

Manhattan Office Report | Second Quarter 2018 9 Midtown South

INVESTMENT TRANSACTIONS

„„ Midtown South’s steady fundamentals attract investor interest, although transaction activity has cooled. Transaction volume in the 12 months ending in April reached nearly $3.7 billion.

„„ More than 1.6 million square feet of office space was sold in Chelsea for $2.6 billion. In Hudson Square, two properties totaling 1.5 million square feet changed hands for a combined $850 million. Three properties encompassing 265,037 square feet sold for $191 million in Gramercy Park.

„„ Office assets completed in the 1900s and 1910s led transaction volume over the past four years, with 3.9 million square feet sold for a combined $3.5 billion. Although properties completed after 2010 are highly amenitized, investment activity for this vintage reached a modest $297 million in sales since 2014.

„„ Google was the market’s most active buyer in the 12 months ending in April. The company paid $2.4 billion for Jamestown’s Chelsea Market. The 1.1 million-square-foot building is lo- cated at 75 9th Ave. and underwent conversion from industrial to office in 1997, as well as a 300,000-square- foot expansion in 2012.

„„ Trinity Real Estate paid $237 million for a 51% interest in Tishman Speyer’s 375 Hudson St. Additionally, Norges Bank purchased a 48% ownership stake in the 1987-built asset for $223 mil- lion. The 19-story tower offers 1 million square feet of Class A office space and underwent major renovations in 2012.

Manhattan Office Report | Second Quarter 2018 10 Lower Manhattan

LEASING | Vacancy

„„ Office vacancy in Lower Manhattan av- eraged 10.7% as of April, encompassing roughly 6.5 million square feet of available space. Sluggish construction and limited leasable space contributed to a surge in oc- cupancy rates.

„„ Increased demand for new construction will drive leasing in 2018, as tenants focus on finding quality space in either newly completed or renovated properties.

„„ Office buildings located in Lower Manhattan’s urban-primary areas were highly sought after, with vacancy rates dropping to 1.1%. Tenants also shifted their interest toward the CBD’s secondary areas, where vacancy rates reached 11.2%.

„„ Tribeca had the tightest office vacancy rate (3.7%), partly due to its low asking prices. The shortage of quality space in the Finan- cial District pushed vacancy rates to 10.5%.

„„ Large corporate users drawn to the World Trade Center area kept vacancy rates in low double digits (14.0%), mostly due to the district’s limited space availability.

Manhattan Office Report | Second Quarter 2018 11 Lower Manhattan

LEASING | Listings

„„ Nearly 5.3 million square feet of office space was listed as of April, at an average asking price of $66.48 per square foot for Class A office properties and $52.99 per square foot for Class B space.

„„ Trophy assets were still scarce, with roughly 151,000 square feet of Class A+ space available in the World Trade Center submarket at an average asking rate of $64.78 per square foot.

„„ The Financial District emerged as the most expensive submarket, with an average asking price of $65.62 per square foot. The traditional business core and economic center is still a hotbed for major institutions. Asking rents for World Trade Center’s overall inventory averaged $64.24 per square foot. Large corporate users continue to be attracted to the area’s strong fundamentals. However, the World Trade Center boasted limited availability, with only 1.1 million square feet of space available as of April.

„„ Tribeca was the most affordable submar- ket, with asking prices of $58.98 per square foot and only 136,601 square feet of avail- able inventory.

Major Tenants

„„ The fourth largest business district in the U.S. is home to multiple financial and media powerhouses. Deutsche Bank remains one of the largest tenants on Wall Street. Media conglomerates Condé Nast, the Meredith Corp.-owned Time Inc. and Spotify occupy great chunks of office space in the area. Due to the amount of space it amassed in the last years, coworking giant WeWork emerged as one of the top private office tenants in the market.

Manhattan Office Report | Second Quarter 2018 12 Lower Manhattan

SUPPLY

„„ Despite the high demand for office space, development activity has been moderate in the past four years. No major projects have come online following the completion of One World Trade Center in 2014. However, nearly 3.4 million square feet of office space is currently underway in the World Trade Center and City Hall submarkets.

„„ More than 3.5 million square feet of space across three properties is in the planning stages.

„„ Two much-anticipated projects are scheduled for completion in early 2018. Silverstein Properties’ 2.5 million-square-foot 3 World Trade Center was initially scheduled to come online by the end of first quarter 2018. However, delivery was pushed back, and a new estimated completion date was set for May. The former Verizon Building—now dubbed 375 Pearl—has undergone a major transformation process, with renovations slated for completion this spring.

Manhattan Office Report | Second Quarter 2018 13 Lower Manhattan

INVESTMENT TRANSACTIONS

„„ Total transaction volume amounted to roughly $964 million in April, as investor interest started showing signs of moderation during the past four quarters.

„„ Three office assets changed hands in Lower Manhattan in the 12 months ending in April. The Financial District led the way in investment sales, with more than 1.6 million square feet sold for a combined $896.8 million. Traditionally one of the country’s hottest submarkets, the Financial District was also the most expensive one, commanding an average $556.04 per square foot. Tribeca attracted investor interest with its more affordable rates, but lagged with an average $222.30 per square foot.

„„ Office assets constructed in the 1980s have appealed the most to investors since 2014, with sales volume topping $2.8 billion. Investors primarily looked for upgraded product at accessible prices. Older properties built in the 1930s traded for a combined $374.8 million, while circa-1900s buildings sold for $336.1 million.

„„ Ivanhoe Cambridge’s $652 million acquisition of 85 Broad was the largest transaction completed during the past four quarters. MetLife Real Estate Investment sold the 1.2 million-square-foot tower for $547.90 per square foot. Invesco Real Estate also tapped into the Financial District and shelled out $232.6 million for a 95% stake in 80 Broad St., the imputed sale price reaching $244.8 million. Broad Street Development sold the asset for $578.95 per square foot.

„„ TIAA paid $67 million for a Class B as- set in Tribeca. Sold by AION Partners, the 28-story Tower 270 at 86 Cham- bers St. was built in 1910 and under- went complete refurbishing in 2001. TIAA’s portfolio is mainly focused on primary CBD and urban properties spanning submarkets including Chel- sea, Murray Hill, Gramercy Park and the Plaza District.

Manhattan Office Report | Second Quarter 2018 14 Yardi Matrix Office Submarkets—Metropolitan Manhattan

Area # Submarket 1 Lower Manhattan 2 Midtown South 3 Midtown 4 Upper Manhattan

Manhattan Office Report | Second Quarter 2018 15 OFFICE REPORT DEFINITIONS AND METHODOLOGY

„„ Office using employment is defined as all jobs within the Professional and Business Services, Financial Activities and Information sectors.

„„ Rents shown in the listing section are reported on a Full Service (FSG) basis. Yardi Matrix subscribers have access to both listed rents and FSG equivalent rents.

„„ Class A and A+/Trophy buildings are combined for reporting purposes.

„„ Yardi Matrix tracks properties with 50,000 square feet or more.

DISCLAIMER

Although every effort is made to ensure the accuracy, timeliness and completeness of the information provided in this publication, the information is provided “AS IS” and Yardi Matrix does not guarantee, warrant, represent or undertake that the information provided is correct, accurate, current or complete. Yardi Matrix is not liable for any loss, claim, or demand arising directly or indirectly from any use or reliance upon the information contained herein.

COPYRIGHT NOTICE

This document, publication and/or presentation (collectively, “document”) is protected by copyright, trademark and other intellectual property laws. Use of this document is subject to the terms and conditions of Yardi Systems, Inc. dba Yardi Matrix’s Terms of Use (http://www.yardimatrix.com/Terms) or other agreement including, but not limited to, restrictions on its use, copying, disclosure, distribution and decompilation. No part of this document may be disclosed or reproduced in any form by any means without the prior written authorization of Yardi Systems, Inc. This document may contain proprietary information about software and service processes, algorithms, and data models which is confidential and constitutes trade secrets. This document is intended for utilization solely in connection with Yardi Matrix publications and for no other purpose.

Yardi®, Yardi Systems, Inc., the Yardi Logo, Yardi Matrix, and the names of Yardi products and services are trademarks or registered trademarks of Yardi Systems, Inc. in the United States and may be protected as trademarks in other countries. All other product, service, or company names mentioned in this document are claimed as trademarks and trade names by their respective companies.

© 2018 Yardi Systems, Inc. All Rights Reserved.

Manhattan Office Report | Second Quarter 2018 16