Key Market Snapshot: Manhattan
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The Manhattan office market remained on course during the third quarter, while volatility in the equities markets, confusion over the Fed policy and heightened concerns over the health of the global economy dominated the headlines.
Unlike other regions of the country, Manhattan has a more subtle reaction to macroeconomic activity.
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Domestic and foreign investors have the New York area at the top of their list of places to keep their capital, and Manhattan has a way of creating its own momentum, in part because the area is home to so many major corporate users. Big deals signed in 2015 include the 544,000-square- foot lease to Skadden, Arps, Slate, Meagher & Flom LLP at 1 Manhattan West, the 506,000-square-foot lease for Publicis Groupe at 1675 Broadway and a 495,000-square-foot lease for MetLife, Inc., all in Midtown.
That kind of activity has got construction booming again. As Q3 came to a close, over 10 million square feet of office space was still under construction, including 3 World Trade Center, a 2.8-million-square- foot building, and the 2.6-million-square-foot building at 30 Hudson Yards. Both properties have strong levels of pre-leasing activity. The 473,000-square- foot building at 7 Bryant Park is the largest property delivered so far in 2015. It is now 61% occupied.
The average asking rental rate moved up another $.91 to $70.76 per square foot in Q3, but rates reached more than $100 per square foot for class A space in premium properties in Midtown where rents have been rising fastest. In particular, rents have spiked in the Plaza District, Grand Central, Times Square and Rockefeller Center areas. However, when new class A space in nearby Hudson Yards comes on line, the pace of rent growth may slow. Downtown’s World Trade Center submarket is also seeing higher rents, especially in the World Trade Center submarket.
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After posting over 2.2 million square feet of net absorption in Q2, things slowed down in Q3, when just a 310,709-square-foot gain was recorded. Demand for class A space is still driving net absorption, offsetting negative growth in class B again in Q3. Vacancy held steady at 8.0% for the period, but has moved down 40 basis points year-over-year. As noted in previous reports, big swings in absorption quarter-to-quarter are not unusual in Manhattan due to so many moves in and out of very large blocks of space along with high levels of construction.
FIRE (Finance, Insurance and Real Estate) tenant tend to stay put in Class A properties and pay higher rents while many TAMI (Technology, Advertising, Media and Information) users are looking to lower costs by locating to re-purposed flex and warehouse space that can be improved with open space designs that attract and help retain younger workers. Some tenants are looking to the outer boroughs, particularly Downtown Brooklyn and Long Island City, to lower occupancy costs. Developers have responded with new investments in retail space, entertainment venues and multi-family residential properties to attract users to a viable alternative to the Manhattan office market.
A Look Ahead
- Absorption totals will continue to see big swings quarter-to-quarter due to a steady stream of large transactions
Lease activity will remain strongest in Midtown and Downtown- Submarkets in proximity to Midtown will see an increase in activity from tenants unable to pay Midtown’s premium rates
- Absorption of Class A space will continue to offset weaker demand for Class B product
- New developments will be mixed-use with residential and retail components
- Cap rates will remain compressed in the mid 4% range
- Foreign investors will compete aggressively to place their capital in New York to reduce risk
Click the following link to download Q3 2015 Office Brief
About the Author Michael Staskiewicz
Michael Staskiewicz, CCIM is the Managing Broker/ Senior Vice President of The Garibaldi Group and Founder of EffectiveWorkplace.com. Michael helps innovative, purpose-driven CEOs clarify the strategic plan for a world-class work environment, so they can attract the best talent and reduce voluntary turnover.