NY Midtown South Marketview Q1 2020

MARKETVIEW

Midtown South Manhattan Office, Q1 2020 Average asking rent stands resilient amid a significant slowdown in leasing activity

Leasing Activity Net Absorption Availability Rate Vacancy Rate Average Asking Rent 0.84 MSF (0.85) MSF 10.7% 7.4% $86.34 PSF

*Arrows indicate change from previous quarter.

MARKET OVERVIEW • Leasing activity totaled 838,000 sq. ft. in Q1 2020, a 39% decrease from Q4 2019, and 41% behind its The COVID-19 pandemic has thrust the world into a five-year quarterly average. monumental public health crisis. The response has • Renewals totaled 239,000 sq. ft. in Q1 2020. included widespread restrictions on mobility and • The availability rate increased to 10.7% in Q1 personal interaction, resulting in severe constraints 2020, up 90 basis points (bps) from the previous on commerce and economic activity that resulted in quarter and up 50 bps from a year earlier. millions of jobs lost in the U.S. in the last few • At negative 853,000 sq. ft., net absorption weeks. While the local NYC retail and hospitality weakened from the prior quarter. markets have been feeling the effects of the COVID- • The average asking rent rose 2% from the prior 19 outbreak for many months, the Manhattan office quarter to $86.34 per sq. ft., a new record high, market performed relatively well through most of and is up 3% year-over-year. Q1 2020, until concerns about the growing crisis led • The hallmark of Midtown South’s Q1 2020 to a noticeable slow-down in office leasing activity lackluster performance was the conspicuous by the end March. absence of any large-scale new leases, which resulted in the slowest leasing activity start for the Midtown South took a step backward to kick off market in 11 years. 2020, with nearly all its key fundamentals The average asking rent remained the primary • weakening. Still, after ending 2019 on a strong note, source of strength for Midtown South, which the market remains in an overall healthy position. continued to introduce premium new construction Leasing activity slowed in Q1 2020 to 838,000 sq. ft., and redeveloped product to market. its lowest quarterly total in roughly three years. In Q1 2020, there were no leases of 100,000 sq. ft. or Figure 1: Top Lease Transactions

Size (Sq. Ft.) Tenant Address

165,577 (R) Digital Chelsea, LLC 111 Eighth Avenue

70,292 Convene 601 West 26th Street

60,696 (RE) Fenwick & West LLP 902 Broadway

30,299 Teachable 470 Park Avenue South

26,300 S9 Architecture 322 Eighth Avenue

Renewal (R), Expansion (E), Renewal and Expansion (RE) Source: CBRE Research, Q1 2020.

larger and only five leases for blocks over 25,000 sq. Convene’s 70,000 sq. ft. lease at 601 West 26th ft. Large blocks are still in short supply, but many Street. One of Midtown South’s few law firms, small-to-mid sized blocks came to market in Q1 Fenwick & West LLP, also expanded and 2019. Net absorption registered negative 853,000 sq. recommitted in Q1 2020 for a total of 61,000 sq. ft. and pushed the availability rate up nearly 100 ft. at 902 Broadway. Meanwhile, the largest deal bps from year-end to 10.7%, its highest level in of the quarter was Digital Chelsea, LLC’s 166,000 almost two and a half years. The average asking rent sq. ft. renewal at 111 Eighth Avenue, the largest finished the quarter at an all-time high of $86.34, building in Midtown South. driven by the addition of several boutique new construction or high-end redevelopments to the Leasing activity in each of Midtown South’s available inventory. submarkets trailed its five-year average in Q1 2020, and all but Park Avenue South/Madison For more information on Manhattan market Square and NoHo/SoHo saw leasing activity expectations during the COVID-19 crisis, click here decline from the prior quarter. In terms of total to download the CBRE Manhattan Office ViewPoint leasing activity, Park Avenue South/Madison released April 1, 2020. Square fared the best in Q1 2020 at 266,000 sq. ft., up 47% from Q4 2019, though 8% behind its

LEASING ACTIVITY

Figure 2: Leasing Activity | Historical Leasing activity in Q1 2020 totaled 838,000 sq. ft., a MSF 39% decline from the prior quarter, and 41% Q1 Q2-Q4 8.0 behind its five-year quarterly average of 1.4 million 7.0 sq. ft. This is also 18% lower than 2019’s Q1 total 6.0 and marks the weakest start to a year for Midtown 5.0 South since 2009. The market saw very few deals of 4.0 size in Q1—no new leases in blocks above 100,000 3.0 sq. ft. and a mere five completed in blocks within 2.0 the 25,000-99,999 sq. ft. range. One factor that has 1.0 hindered larger transactions is Midtown South’s 0.0 2013 2014 2015 2016 2017 2018 2019 2020 limited supply of large blocks. Nine of the fifteen available blocks 100,000 sq. ft. or larger are in new Source: CBRE Research, Q1 2020. construction or premium redevelopment projects, most of which do not fulfill tenants’ need for Figure 3: Leasing Activity | By Submarket immediate space. Renewals totaled 239,000 sq. ft. in 000s Sq. Ft. Q1 2020, a 22% share of the total leasing velocity 5Y Quarterly Avg. Q1 2020 350 figure of 1.1 million sq. ft. 300 250 In terms of tenant mix, leasing activity in Q1 2020 200 was led by the tech and flexible space sectors. The 150 tech sector accounted for a 23% share of leasing 100 activity, with Teachable’s 30,000 sq. ft. lease at 470 50 Park Avenue South and Shopify’s 24,000 sq. ft. 0 sublease at 148 Lafayette Street among the largest deals inked. The flexible space sector followed closely behind, making up a 21% share, and yielded Source: CBRE Research, Q1 2020. the second largest deal of the quarter with

five-year quarterly average. In addition to Amid the growing COVID-19 crisis, sublease Teachable’s lease, the submarket saw Vitech Systems space additions, both the nature and quantity, Group, Inc. expand at 401 Park Avenue South for will be monitored closely in the coming months. 21,000 sq. ft. and WE Communication’s new In recent history, Midtown South had seen a commitment at 16 East 34th Street for 19,000 sq. ft. consistent flow of sublease space come to Chelsea logged the second-highest leasing activity market. However, many of these were high- total at 186,000 sq. ft., despite being down quality built spaces commanding premium considerably from the prior quarter and its five-year pricing and thus not a cause for concern. Q1 quarterly average. Behind Convene’s deal, S9 2020 was no exception, with Peloton Interactive Architecture completed a lease at 322 Eighth Avenue LLC’s 65,000 sq. ft. space at 125 West 25th Street for 26,000 sq. ft. in the submarket. On the flip side, asking nearly $90 per sq. ft. coming online and Hudson Square/Tribeca – which came off a record- Accenture Ltd.’s 46,000 sq. ft. space at 155 setting 2019 – saw the worst performance, amassing Avenue of the America’s commanding above- just 56,000 sq. of leasing activity in Q1 2020. average asking rent. Additionally, the percent of sublease space as a share of total space had been NET ABSORPTION AND AVAILABILITY maintaining a healthy level, at 25% as of Q1 2020. Any dramatic shifts in these trends would Midtown South’s anemic leasing activity, coupled with a slew of small-to-mid sized blocks between Figure 4: Net Absorption | Historical roughly 15,000 and 50,000 sq. ft. coming to market, MSF served to generate substantial negative absorption 1.5 of 853,000 sq. ft. in Q1 2020. This comes off the 1.0 heels of a Q4 2019 that saw net absorption swing 0.5 down to negative 601,000 sq. ft. after two 0.0 consecutive quarters of positive net absorption. The (0.5) one large block that came online in Q1 2020 was (1.0) 174,000 sq. ft. of direct space at 124 East 14th Street, (1.5) a portion of the broader new construction project geared toward the tech community known as Zero (2.0) 2013 2014 2015 2016 2017 2018 2019 YTD 2020 Irving. The quarter also saw the addition of two roughly 90,000 sq. ft. premium boutique projects to Source: CBRE Research, Q1 2020. the inventory and availability: the new construction building at 205 West 28th Street in Chelsea and the redevelopment at 60 Charlton Street in Hudson Figure 5: Quarterly Net Absorption | By Submarket Square/Tribeca. The remaining space additions were 000s Sq. Ft. all below 75,000 sq. ft. and reflected a mix of direct 200 and sublease space. 100 0 (100) As a result, Midtown South’s overall availability rate (200) grew 90 bps from year-end 2019 to 10.7%. After (300) residing in the 9% range for the entire second half (400) of 2019, Q1 2020’s availability rate marks its highest (500) level since October 2018. Despite the upswing, Midtown South remains the tightest market in Manhattan, with the next closest being Midtown at Source: CBRE Research, Q1 2020. 11.8%.

likely portend a downward shift in the overall asking Figure 6: Sublease and Direct Availability Rate | Historical rent trajectory. % Direct Sublease 12

Looking at the submarkets, all but one registered 10 2.7 negative net absorption in Q1 2020. Park Avenue 8 South/Madison Square was the exception, at positive 6 107,000 sq. ft. Virtually all of the spaces added in Park Avenue South/Madison Square during the 4 8.0 quarter were below 35,000 sq. ft. This resulted in a 2 70 bps drop in the availability rate from the prior 0 quarter to 11.4%. Conversely, Chelsea experienced 2013 2014 2015 2016 2017 2018 2019 2020 the worst bout of negative net absorption at 388,000 Source: CBRE Research, Q1 2020. sq. ft. Along with 205 West 28th Street, the submarket saw 72,000 sq. ft. at the 541 West 21st Street redevelopment come to market, among several other mid-sized blocks. Notably, this included 60 and 70 Gansevoort Street, the two Figure 7: Availability Rate | By Submarket % buildings at the high-end redevelopment known as Q1 2019 Q1 2020 Midtown South Gansevoort Row, offering 38,000 and 35,000 sq. ft., 16 14 respectively. This pushed Chelsea’s availability rate 12 up to 11.6%. Still, Union Square holds the highest 10 availability in Midtown South at 15.0%, while 8 6 Flatiron claims the lowest at 7.3% 4 2 AVERAGE ASKING RENT 0

Amid Midtown South’s otherwise weaker fundamentals in Q1, its overall average asking rent Source: CBRE Research, Q1 2020. remained a bright spot. At $86.34 per sq. ft., the average asking rent notched a new record high, growing 2% quarter-over-quarter and 3% from one year ago. Moreover, at this level it now stands just below Midtown’s average asking rent of $87.00 per Figure 8: Average Asking Rent | Historical sq. ft. The steady influx of premium direct space $ per Sq. Ft. Overall Sublease from various boutique new construction and 90 redevelopment projects has continued to dovetail $86.34 with the string of smaller sized – but above-average 80 priced – sublease spaces coming to market, 70 resulting in the sustained strength of the overall $68.46 60 average asking rent. Midtown South’s direct average asking rent rose 2% from the prior quarter to an 50 impressive $92.62 per sq. ft. in Q1 2020. Meanwhile, 40 the sublet average asking rent stood flat from a 2013 2014 2015 2016 2017 2018 2019 2020 quarter ago, at $68.46 per sq. ft., and remains the highest sublet average asking rent among Source: CBRE Research, Q1 2020. Manhattan’s major markets.

On the submarket level, Union Square and Chelsea Figure 9: Average Asking Rents | By Submarket saw the strongest average asking rent growth from $ per Sq. Ft. the prior quarter in Q1 2020, both rising by 4%. Q1 2019 Q1 2020 Midtown South 120 Union Square’s average asking rent reached $105.45 100 per sq. ft. driven by the 174,000 sq. ft. space at 124 East 14th Street asking between $95-$155 per sq. ft. 80 With Union Square being the smallest submarket in 60

Manhattan, this addition had an outsized impact on 40 its average asking rent. Chelsea’s average asking rent 20 rose to $88.58 per sq. ft. Some of the additions propelling this increase included the premium space 0 at 205 West 28th Street, the space at 541 West 21st Street asking $90 per sq. ft., and the blocks at Gansevoort Row fetching $150 per sq. ft. Chelsea also Source: CBRE Research, Q1 2020. saw a few lower-than-average priced blocks come off Figure 10: Concession Values | Rent Abatement and T.I. Allowance* the market in Q1 2020 that helped provide additional upward pressure on its average asking rent. On the $ per Sq. Ft. 2019-YTD 2020 Average 170 other hand, Flatiron saw its average asking rent fall the most from a quarter ago by 3% to $76.61 per sq. 150 ft. This was primarily due to some spaces priced 130 above average being leased – in particular Zillow, Inc.’s 53,000 sq. ft. space at 130 Fifth Avenue and 110 Infor’s 22,000 sq. ft. space at 641 Avenue of the 90 Americas, both asking $85 per. sq. ft. 70

TAKING RENT INDEX 50 6 8 10 12 14 16 18 20 Months After seeing growth in six of the last eight quarters, *This study examines all direct new leases over the past 15 months larger than 25,000 RSF with a term length greater than 10 years (omits renewals and expansions). culminating with an all-time high of 101.3% in Q4 Source: CBRE Research, Q1 2020. 2019, Midtown South’s taking rent index fell significantly in Q1 2020 to 94.9%, the lowest level Figure 11: Concession Values | Historical* since January 2019. The weighted average of Months Free Rent T.I. $ per Sq. Ft. concession packages for new leases of raw space 20 $102.07 completed over the past 15 months averaged $102.07 $100 per sq. ft. in tenant improvement allowance, up 17% 15 from year-end 2018, and 13 months of free rent. The 13 $75 increase in average tenant improvement allowance is 10 reflective of the uptick in deals getting completed in $50 Midtown South’s high-end new and redeveloped 5 $25 buildings during that timeframe.

0 $0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 YTD 2020 *This study examines all direct new leases larger than 25,000 RSF with a term length greater than 10 years (omits renewals and expansions). YTD 2020 figure reflects a blended average of 2019-YTD 2020.

Source: CBRE Research, Q1 2020.

INVENTORY AT A GLANCE DEFINITIONS

Availability — Space that is being actively marketed and is available for tenant build-out within 12 months. Includes space available for sublease as well as space in buildings under construction. Asking Rent — Weighted average asking rent. Concession Values — The combination of rent abatement and T.I. allowance. The graph is for new leases for raw space of 25,000 sq. ft. or greater consummated year-to-date, this excludes expansion and renewal deals. Leasing Activity — Total amount of sq. ft. leased within a specified period of time, including new deals, expansions, and pre-leasing, but excluding renewals. Leasing Velocity — Total amount of sq. ft. leased within a specified period of time, including new deals, expansions, and pre-leasing and renewals. Net Absorption — The change in the amount of committed sq. ft. within a specified period of time, as measured by the change in available sq. ft. Rent Abatement — The time between lease commencement and rent commencement. Taking Rent — Actual, initial base rent in a lease agreement. Taking Rent Index — Initial taking rents as a percentage of asking rents. T.I. — Tenant Improvements. Vacancy — Unoccupied space available for lease. Percentage of Leasing by Industry —The percentage of sq. ft. leased by an industry based on transactions where a tenant and industry have been confirmed.

SURVEY CRITERIA

CBRE’s market report analyzes fully modernized office buildings that total 50,000+ sq. ft. in Midtown South, including owner-occupied buildings (except those owned and occupied by a government or government agency). New construction must be available for tenant build-out within 12 months. CBRE assembles all information through telephone canvassing and listings received from owners, tenants and members of the commercial real estate brokerage community.

CONTACTS

Nicole LaRusso Philip Stern Director, Research & Analysis Senior Field Research Analyst +1 212 984 7188 +1 212 656 0516 [email protected] [email protected]

To learn more about CBRE Research, or to access additional research reports, Mike Slattery please visit the Global Research Gateway at: www.cbre.com/researchgateway. Field Research Manager +1 212 656 0583 [email protected]

Disclaimer: Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CBRE.