Savills Studley Research City

Savills Studley Report office sector Q3 2018

SUMMARY

Market Highlights

LITTLE CHANGE IN AVAILABILITY Midtown's Class A average rent inched up by 0.2% to $89.35. "WeWork recently supplanted JPMorgan Chase ’s overall availability rate inched as the top tenant in Manhattan. There can be no lower, falling from 11.7% to 11.6%, but has LEASING DECLINES IN QUARTER disputing 's success in disrupting office increased by 40 basis points from a year Leasing volume fell to 8.4 million square feet leasing. It will take a recession to see if this sector's ago. The Class A availability rate fell by 40 (msf) in the third quarter. Several substantial footprint will become a fixture or falter instead." basis points to 12.3%, with a 140 basis bank leases, and continued growth in the Jeffrey Peck, Vice Chairman point decrease in Midtown South's Class A coworking sector, topped leasing activity. rate to 12.9% and 30 basis point declines in Year-to-date leasing (28.5 msf) is the highest "Leasing activity has been running above average both Midtown and Downtown, to 10.9% and it has been since 2014. since the start of 2017. A recent burst in economic 17.2%, respectively. growth, coupled with a willingness among firms to INVESTMENT SALES RISE OVERALL RENT FALLS SLIGHTLY invest in the workplace has kept volume in Midtown Office property sales during the first seven elevated. Even so, leasing is barely keeping pace Manhattan’s average asking rent decreased months of the year totaled $11.6 billion, a by 0.3% from $74.41 to $74.21 during with the delivery of new supply and continued space 46% increase compared to the first seven densification." the third quarter. Rent increased by 0.6% months of 2017. compared to the third quarter of 2017. Erik Schmall, Vice Chairman Savills Studley Report | New York City

Tenants of First Resort Office-Using Trends Conditions are far from normal in Manhattan’s Millions office market. Some of the market dynamics 1.60 6% driving leasing are familiar, others are not. Brisk demand for talent and increased expenditures 4% 1.40 on the workplace by business services and 2% banking are par for the course. On the other 1.20 hand, leasing is boosted by unprecedented 0% levels of competition for space among tech 1.00 companies as well as coworking providers. -2% 0.80 -4% Business fundamentals underlying office space 0.60 demand are as strong as they have been in -6% the last several years both nationally and in Manhattan. Companies are investing in payroll 0.40 -8% expansion and the workplace. Leasing activity 2011 2012 2009 2010 2014 2015 2016 2017 2018 0.20 2013 -10% has been running about 20% above its historical NYC Off. Emp. NYC (% Annual Change) U.S.(% Annual Change) average since the start of 2017. Tenants leased Source: Bureau of Labor Statistics 61.8 msf since the start of 2017, well above the 50.2 msf leased in the prior seven quarters. More than 90 leases over 100,000 sf have Availability Rate Trends (All Classes) been signed since the start of 2017, compared Overall Availability Rate Trends to 73 in the prior seven quarters. Finance and insurance accounted for nearly 30 of the leases in the recent surge. Coworking providers 15% represented nine of the 100,000-plus sf deals. 14.6% 13.0% Modest Expansion in the Core 11.5% 11.3% What has brought this surge of demand since 10% 9.2% 2017? For one, Manhattan’s core tenant base 8.4% is expanding with growth in sectors ranging from general business and personal services to non-profits such as The Nature Conservancy. 5% Financial services account for the biggest expansions. Evercore Partners, Apollo Global Management and Hall Capital Partners have all expanded recently. Wall Street profits through Midtown Midtown South Downtown the first half of 2018, totaled $13.7 billion, the 0% most since 2010. Additionally, the tax reform Q3 '17 Q4 '17 Q1 '18 Q2 '18 Q3 '18 bill passed in late 2017 is providing some companies a bit of a windfall. Some firms are deploying the extra funds to add employees and Asking Rent Trends (All Classes) ($/sf) increase their lease commitments. Firms are Overall Rental Rate Trends leasing high-quality space with natural light and views. Buildings with extensive amenities that $100 enhance employee comfort provide recruiting and retention advantages. $78.03 $78.46 $80 Facebook Nudges WeWork $70.59 $76.13 $60 Demand from traditional firms has jumped $64.41 $63.41 within the last few quarters. Expansion among core tenants is not what is giving this leasing $40 market its punch. Rather, intensifying demand among tech and coworking companies pushed activity to another level. Tech and coworking $20 companies are sometimes crossing paths as competitors for space. Facebook reportedly is taking the entirety of 63 Madison, bumping Midtown Midtown South Downtown $0 WeWork from the spot. Q3 '17 Q4 '17 Q1 '18 Q2 '18 Q3 '18 and WeWork are leading the charge

02 Q3 2018

among tech and coworking companies. Google’s East Coast campus is completely Availability Rate Comparison Rental Rate Comparison ($/sf) City Hall transforming Hudson Square. Google’s 4.9% Hudson Yards $103.67 demand has spilled well beyond its owned Union Square 6.5% Soho $100.95 Greenwich Village 7.8% Plaza North $100.70 building at 111 Eighth, into multiple buildings Flatiron 8.1% Greenwich Village $90.82 in Hudson Square. The behemoth is reportedly Park Ave S./Madison Square 8.6% Plaza South $86.15 working on leases exceeding 1.0 msf on the Midtown South 9.2% Midtown $78.46 Chelsea 10.1% Far Westside. Tenants in Hudson Square are Columbus Circle $77.33 Penn Plaza/TSQ South 10.2% Midtown South $76.13 increasingly being pushed to other areas. It is Columbus Circle 10.6% Chelsea $76.00 not just Google or Hudson Square, though. Times Square 10.9% Times Square $75.01 Tech and creative sector growth is sparking Grand Central 11.3% Union Square $74.96 Midtown 11.3% Hudson Square $74.80 intense competition for space between 28th Plaza North 11.4% Manhattan $74.21 and Canal Street. In Flatiron, competition Manhattan 11.6% Grand Central $74.20 among coworking providers combined with Soho 12.1% Park Ave S./Madison Square $72.84 Hudson Yards 12.3% Tribeca $70.48 strong demand from Fortune 100 companies, Plaza South 12.6% WTC/Brookfield Place $69.05 has stripped this submarket almost bare of big Financial District 13.4% East Side/UN $68.77 blocks of space. Hudson Square 13.6% Flatiron $64.43 Downtown 14.6% Penn Plaza/TSQ South $63.81 Tribeca 15.2% Downtown $63.41 First to Lease WTC/Brookfield Place 17.5% Financial District $57.84 U.S. Index 18.1% City Hall $52.38 Many Hudson Square landlords now hold East Side/UN 20.6% U.S. Index $34.37 space to see if Google will bite. Landlords 0% 5% 10% 15% 20% 25% $0 $15 $30 $45 $60 $75 $90 $105 $120 across Manhattan with a big block of space on lower floors are banking on WeWork to swallow space. Why bother with a marketing program? Major Transactions The two companies have become tenants of Tenant Sq Feet Address Market Area first resort. Pfizer^ 350,000 219 E 42nd St Grand Central Evercore Partners Inc.** 350,000 55 E 52nd St Plaza District Google and WeWork also support leasing WeWork 258,344 368 Ninth Ave Penn Plaza/Garment from related firms. Vendors and contractors Bessemer Trust 239,000 1271 Avenue of the Americas Columbus Circle congregate around Google. Competitors Convene 116,000 530 Fifth Ave Times Square are trying to keep up with WeWork, further Spaces 109,364 405 Lexington Ave Grand Central increasing the impact of fractional office Spaces 100,613 287 Park Ave S Gramercy Park space providers on availability. WeWork Spaces 99,000 787 11th Ave Columbus Circle added 500,000 sf in the third quarter. Spaces Industrial and Commercial Bank of 98,594 1185 Avenue of the Americas Times Square (Regus’ coworking subsidiary) took just over Carlyle Group 94,367 1 Vanderbilt Ave Grand Central 300,000 sf - absorbing three big blocks at 405 Sum of Top Leases 1,815,282 Sum of 3rd Quarter Leasing Activity 8.4 MSF

Lexington Avenue, 287 Park Avenue South **Renewal & Expansion and 787 11th Avenue. Knotel also added five ^Sale-Leaseback locations, pushing its presence in Manhattan to more than 1.4 msf. Meanwhile, WeWork they can customize space in these centers. Flex space whether it is from a landlord, sub- offers hefty discounts to firms opting to relocate Traditionally, landlords have been unwilling to fit lessor or a fractional office space provider from competing centers. These providers are space with high-end installations and finishes expands the range of options available to firms. chasing market share – carving out a segment unless the tenant is committed to at least five of the market (commodity space) that would years or more. Even when they have, there is Treading Water otherwise lease only through a sharp discount typically a big recuperation clause. or have to be repositioned. If any one of these recent drivers of office The proliferation of coworking space options, in space demand dissipates, the current burst As WeWork, Spaces and Knotel continue their tandem with an abundance of space options for could peter out. Even with all of this support, growth, another group of fractional office space small and mid-sized tenants has disrupted the the market as a whole is barely keeping up providers are positioning themselves as the market in multiple ways. Tenants that want to with the continued addition of new product “bespoke and agile” specialists in this evolving wait out the market or delay major expansions and the space givebacks coming from ongoing space. Industrious, for example, is partnering now have several million square feet of options. space consolidation. Much of the market with tenants and landlords, highlighting its It is no longer just coworking providers fulfilling seems to be treading water. Availability is up ability to co-create flexible space with tenants. this need. Some landlords are jumping on the by 40 basis points from a year ago across all Convene is customizing the amenity and flex space bandwagon. Tenants wanting to of New York City and has increased steadily services package for several landlords. wait out the market or unable to commit can Downtown. Demand has barely kept up with extend their lease or take coworking space. new construction and densification. And more The Flex Option A significant increase in sublet space or built buildings are poised to hit the market in the next space, would change the equation entirely, few years – both from new construction and The strongest selling point of coworking space creating a third option for tenants. A fourth repositioned properties. for traditional corporate tenants is its flexibility. option may be available if more landlords simply Coworking space frees tenants from long-term decide to set up flex space in their portfolio, and commitments, but they will sacrifice how much offer that as an added service to their tenants.

savills-studley.com/research 03 Savills Studley Report | New York City

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 27,548 513 2,907 0.7% 2,310 10.6% 0.1% 8.4% $77.33 2.6% $76.98 1 Columbus Circle - Class A 19,453 405 1,858 2.6% 1,485 9.6% 0.2% 7.6% $84.66 2.9% $81.86 Times Square 32,586 632 3,567 9.9% 3,539 10.9% 1.0% 10.8% $75.01 -5.2% $76.04 2 Times Square - Class A 28,190 394 2,409 -8.4% 2,217 8.5% -0.8% 7.9% $82.56 -2.5% $81.04 Hudson Yards 7,413 0 915 -1.8% 608 12.3% -0.2% 8.9% $103.67 -4.3% $89.50 3 Hudson Yards - Class A 6,106 0 895 -0.2% 386 14.7% 0.0% 7.1% $104.70 -4.8% $109.34 Penn Plaza/Times Square South 54,638 1,229 5,586 -1.7% 5,216 10.2% -0.3% 9.5% $63.81 -0.9% $62.91 4 Penn Plaza/Times Square South - Class A 8,068 126 683 -12.5% 830 8.5% -1.2% 10.3% $86.29 2.2% $82.95 Plaza North 28,662 416 3,253 -22.1% 4,338 11.4% -3.2% 15.0% $100.70 1.6% $96.45 5 Plaza North - Class A 22,080 391 2,700 -25.1% 3,786 12.2% -4.1% 17.1% $106.85 2.9% $101.40 Plaza South 42,065 1,406 5,282 5.2% 5,679 12.6% 0.6% 13.5% $86.15 4.1% $88.80 6 Plaza South - Class A 36,987 1,129 4,539 10.4% 5,063 12.3% 1.2% 13.7% $89.07 3.1% $91.12 Grand Central 67,591 1,824 7,628 2.2% 8,593 11.3% 0.1% 12.8% $74.20 1.0% $71.13 7 Grand Central - Class A 37,126 942 4,014 5.9% 5,099 10.8% 0.5% 13.9% $84.38 1.1% $76.81 East Side/UN 3,005 0 620 4.2% 31 20.6% 0.8% 1.0% $68.77 0.1% $63.03 8 East Side/UN - Class A 783 0 182 9.6% 1 23.2% 2.0% 0.2% $79.21 -0.3% N/A 9 Chelsea 16,842 183 1,697 -7.5% 1,746 10.1% -0.8% 10.4% $76.00 -2.9% $67.16 Chelsea - Class A 1,051 6 346 -11.3% 387 33.0% -4.2% 36.9% $133.60 -0.3% $125.43 10 Flatiron 13,578 238 1,099 7.6% 919 8.1% 0.4% 6.9% $64.43 -1.1% $68.49 Flatiron - Class A 858 58 0 -100.0% 0 0.0% -6.7% 0.0% N/A -100.0% N/A 11 Park Ave South/Madison Square 23,417 321 2,007 18.4% 1,682 8.6% 1.3% 7.2% $72.84 5.8% $65.63 Park Ave South/Madison Sq. - Class A 3,413 0 100 0.0% 0 2.9% 0.0% 0.0% $98.00 0.0% N/A Union Square 7,724 205 498 -21.7% 506 6.5% -1.9% 6.7% $74.96 -4.8% $75.36 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 7,452 120 579 -4.1% 372 7.8% -0.6% 5.2% $90.82 -3.4% $84.14 13 Greenwich Village - Class A 995 2 194 14.8% 100 19.5% 1.4% 12.2% $126.10 -14.7% $125.37 14 Hudson Square 8,494 115 1,158 -13.1% 943 13.6% -2.1% 11.1% $74.80 0.8% $77.60 Hudson Square - Class A 2,065 22 341 -14.9% 0 16.5% -2.9% 0.0% $75.58 3.2% N/A 15 Soho 4,422 194 536 -12.4% 622 12.1% -2.3% 15.0% $100.95 9.9% $75.56 Soho - Class A 262 N/A 135 21.4% 86 51.4% 4.8% 36.3% $105.20 -2.4% $116.65 16 Tribeca 4,948 0 752 6.3% 544 15.2% 0.8% 11.1% $70.48 -0.8% $74.12 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 3,962 75 195 -14.1% 300 4.9% -1.0% 7.8% $52.38 -1.4% $53.54 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 32,857 369 5,751 -3.6% 5,737 17.5% -0.7% 17.5% $69.05 0.3% $70.79 WTC/Brookfield Place - Class A 21,821 177 3,940 -3.7% 4,307 18.1% -0.7% 19.7% $73.81 -0.3% $76.09 19 Financial District 47,566 608 6,381 6.2% 4,969 13.4% 0.8% 10.4% $57.84 0.1% $56.63 Financial District- Class A 21,938 267 3,592 0.8% 3,075 16.4% 0.1% 14.0% $61.75 0.1% $60.03 1-8 Midtown 263,508 6,022 29,758 -0.8% 30,314 11.3% -0.1% 11.5% $78.46 -0.2% $78.03 Midtown - Class A 158,792 3,387 17,280 -2.9% 18,867 10.9% -0.3% 12.0% $89.35 0.2% $86.10 Midtown South Total 81,929 1,376 7,575 -2.1% 6,791 9.2% -0.3% 8.4% $76.13 0.0% $70.59 9-15 Midtown South - Class A 8,643 88 1,116 -9.2% 574 12.9% -1.4% 6.8% $105.62 -2.8% $111.96 Downtown Total 89,332 1,052 13,079 1.3% 11,550 14.6% 0.2% 13.0% $63.41 -0.2% $64.41 16-19 Downtown Total - Class A 43,759 444 7,533 -1.6% 7,381 17.2% -0.3% 16.9% $68.61 0.5% $68.86 Manhattan Total 434,769 8,450 50,412 -0.5% 48,656 11.6% -0.1% 11.2% $74.21 -0.3% $73.76 Manhattan Total - Class A 211,194 3,919 25,928 -2.8% 26,822 12.3% -0.4% 12.8% $83.15 -0.1% $81.92

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*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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