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.