Savills Studley Research New York City Savills Studley Report New York City office sector Q2 2018 SUMMARY Market Highlights AVAILABILITY RATE HOLDS STEADY in Class A rent. "Even as WeWork and other shared office Manhattan’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% Greenwich Village $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% Times Square $79.10 Times Square 10.0% Union Square $78.75 Columbus Circle 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% Hudson Square $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% Tribeca $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% East Side/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 Broadway 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 Park Avenue 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.