2012 q4 office manhattan

Tenant View Manhattan Office Q4 2012

The year ends with sluggish activity hh

DTZ Research

January 2013

Contents

Economic Overview 2

Market Overview 3

Downtown 4

Midtown 5

Midtown South 6

Contacts 11

Author

Xueying Li

Senior Research Analyst

+1 212 328 4212

[email protected]

Contacts

John Wickes

Head of Americas Research

+1 312 424 8087

[email protected]

Hans Vrensen

Global Head of Research

+ 44 (0)20 3296 2159

[email protected]

It seems likely that 2012 will be remembered as a year where large transactions nearly disappeared and overall leasing activity became sluggish, but most other fundamentals held up well. Manhattan is still seen by many corporations, professional services firms and investors as this country’s most global city, a key hub for talent and critical to their long term business strategy. Overall in 2012, total leasing activity registered 21.8 million square feet, 25 % less than that for 2011. Most experts agreed the drop off was due largely to large companies’ concerns about committing to space during what was a year of insecurity given the presidential election, the Euro Zone crisis, an economy that was sluggish throughout much of the year, the so-called “fiscal cliff,” uncertainties in Manhattan’s bellwether financial services industry and so on. Our forecast for the first half of 2013 calls for continued modest declines in the vacancy rate, marginally higher average asking rents, a further drop in the city’s unemployment rate and some improvement in leasing volume. However, we anticipate smaller-sized deals continuing to predominate and office employment possibly not keeping pace with other sectors due to cutbacks in financial services and banking. A further slowdown in venture capital funding may also inhibit the growth previously enjoyed by the technology sector. Figure 1

Average Asking Rents vs. Overall Vacancy

6.5%

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$ vs %

Average Asking Rent Overall Vacancy

Manhattan Q4 2012

www.dtz.com Tenant View 2

Economic Overview Despite Sandy, New York’s unemployment rate fell

The U.S. economy added 155,000 jobs in December and the unemployment rate remained unchanged at 7.8%, according to the Bureau of Labor Statistics. During 2012, the 68,000 jobs were lost in the public sector; however, the private sector added 1.9 million jobs, notably in health care, food and beverage service, construction and manufacturing sectors.

The New York State unemployment rate fell from 8.7% to 8.2% between October and December 2012. As a result of Hurricane Sandy, more than 29,000 private sector jobs were lost in November. Despite the negative impact of the storm to the state’s economy, New York State added 83,500 private sector jobs in 2012, a sign of moderate economic recovery.

According to the New York State Labor Department, in the 12 month period leading up to November, the New York City economy added more than 66,000 jobs. Additionally, the unemployment rate in New York City fell to 8.8% in December from its peak in both June and July staying at 10.0%, still a decline from 9.3% at the beginning of 2012. Several sectors saw large gains in employment in over 2012, including professional and business services, education and health services, however, there were job losses in financial services, natural resources, mining, construction and manufacturing. As the nation’s economy grew moderately in the second half of the year, the consensus is that this reflected increased business confidence and would continue to translate into a stronger job market in 2013.

According to a report by the Independent Budget Office of New York City, by 2016, the city is expected to continue increased employment and a decreased unemployment rate from 8.8% to 6.1% by adding jobs in health care, education and technology sectors. Near term, however, the job market recovery is expected to be slow due to the well known problems being experienced by financial firms.

Figure 2

Unemployment

Figure 3

Leasing Activity

4.8%

7.0%

10.0%

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9.1%

8.8%

4.7%

6.7%

8.8%

8.3%

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Dec 07

Dec 08

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%

State NYC

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SF

Direct Leasing Sublet Leasing

Manhattan Q4 2012


Market Overview

Rental Rates

For the Manhattan office market overall, average asking rents increased quarter-over-quarter, rising by $0.45 to $60.62. Most of the increase was due to continued growth in Class B rents, which rose to $46.06, $3.00 higher than the third quarter 2011.

The Class A rental rate rose by $0.15 following a $0.37 decrease in the third quarter.

The Class B rental rate climbed from $45.55 to $46.06, reflecting value hunting by firms seeking to offset persistent high rates in Class A assets.

Vacancy

The overall vacancy rate dropped 10 basis points to 7.4% after having spiked upward in the third quarter. It is now back below the level of a year ago.

The Class A vacancy rate fell from 8.5% to 8.4%, while the Class B rate remained the same.

The overall vacancy rate was highest in Midtown and lowest in Midtown South.

Supply

The total availability rate dropped to 11.7% in the fourth quarter 2012, the lowest level in the last three years. Both direct and sublet availability decreased from the third quarter.

Direct availability decreased 20 basis points quarter-over-quarter to 9.7%

Sublet availability fell to 2.0%, a decrease of 10 basis points.

Net Absorption Notwithstanding the stagnant economy and a slowdown in leasing volume, net absorption turned positive for the fifth time in the past six quarters.

Total net absorption for 2012 registered 2.3 million square feet, nearly double the 1.2 million square feet recorded in 2011.

This underlines the fundamental strength of the New York economy and Manhattan leasing market.

Figure 4

Average Asking Rents

Figure 5

Overall Vacancy

Figure 6

Deliveries vs. Net Absorption

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Deliveries Net Absorption

Manhattan Q4 2012


Downtown

Rental Rates

For Downtown landlords, 2012 was a good year with every quarter surpassing average rental rates achieved in the same period a year earlier.

Overall, Downtown saw its rental rate rise by 4% year over year, with a yearend average asking price of $41.45.

These increases may not be sustainable however, due to the impact of Hurricane Sandy, as well as upcoming availabilities in the downtown area.

Both Class A and Class B space displayed modest quarter-over-quarter rental growth.

Class A asking rents rose by $0.10, going from $41.41 to $41.51.

Class B asking rents inflated by $0.51, rising from $37.36 to $37.87.

Vacancy

The overall vacancy rate Downtown dropped to an historical low of 6.4% in the fourth quarter 2012.

The Class A vacancy rate edged down slightly relative to the last quarter, falling from 6.9% to 6.8%.

Class B buildings, as the assets most of interest to growing media and technology companies, showed a further decline in the vacancy rate, which fell from 5.5% to 5.2% quarter-over-quarter.

Leasing Activity

Numerous media and technology companies left Midtown South for Downtown, seeking cheaper rents. Thus, leasing activity Downtown remained at the level of 1 million square feet per quarter in 2012.

By the end of 2012, total leasing activity downtown totalled 6.5 million square feet. In the fourth quarter, however, total leasing activity registered just 1.1 million square feet.

Nielsen, the well known media company, signed a lease for 160,000 square feet in a relocation of their offices to Goldman Sachs' former headquarters at 85 Broad Street in the Financial District.

Figure 7


Figure 8


Figure 9

Overall Vacancy

2.0%

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Manhattan Q4 2012


Midtown

Rental Rates

Average asking rents in Midtown were up $1.20 for the year and $0.36 quarter-over-quarter. By contrast, overall asking rents ballooned by $4.61 in 2011.

With the exception of the Plaza District, all submarkets saw a quarter-over-quarter rise in asking rents. Plaza District, which remains Manhattan’s priciest submarket, saw rents fall from $88.97 in the third quarter to $87.75.

Class B asking rates rose for the fifth consecutive quarter, increasing by $0.41 to $48.11 per square foot.

The combined average asking rental rate in Midtown rose to $69.88 in the fourth quarter from $69.52 in the previous quarter. Class A rates averaged $79.78, once again nearing the $80.00 barrier.

Vacancy

The overall vacancy rate in Midtown ticked down quarter-over-quarter, falling by 0.1% to 8.2%. This was higher however, than the 7.7% recorded in the fourth quarter last year.

For Class A buildings, the vacancy rate declined 0.1% to 9.1% in the third quarter.

Class B buildings however, saw their vacancy rate remain level at 6.6%.

From the beginning of 2012, Midtown replaced Downtown as having the highest vacancy rate among the three submarket clusters.

Leasing Activity

Overall leasing activity totalled 4.2 million square feet, a quarter-over-quarter decline of 1 million square feet. Smaller deals predominated, although two large renewals at year’s end boosted the market.

UBS renewed and expanded for 890,000 square feet at 1285 Avenue of the Americas, an increase of 190,000 square feet and Jefferies & Company signed a 15-year renewal for 345,000 square feet at 520 Madison Avenue.

Figure 10


Figure 11


Figure 12

Overall Vacancy

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Class A Class B

Manhattan Q4 2012


Midtown South

Rental Rates

Midtown South’s average rental rate grew by $0.88 during the fourth quarter, rising to $49.44 per square foot. This was the largest increase among the three market clusters.

Rental rates for Class A buildings in Midtown South picked up by $0.73 in the fourth quarter after having held firm at $52.48 for the first three quarters of the year, closing at $53.21 per square foot.

Class B rental rates continued their trend of increasing every quarter, as they have throughout the past two years, climbing by $0.54 to $48.68 per square foot in the fourth quarter.

As a result of the steady increases, many technology and media companies, which have long favored Midtown South, have been forced to look at other markets both in and outside Manhattan.

Vacancy Midtown South’s overall vacancy rate returned to the same level recorded in the fourth quarter of 2011, standing at 5.9%. As prices have nonetheless continued to climb, many tenants have been priced out of the market.

The Class A vacancy rate moved up from 6.5 to 7.1%

Class B vacancy rate grew from 4.0% to 4.2%

Supply and Demand Despite a decrease in sublet availability, the overall availability rate rose from 8.8% in the third quarter to 9.0%, as the result of an even greater increase in direct available space.

The largest deal in Midtown South this quarter was signed by Medidata Solutions, which took 98,585 square feet at 350 Hudson Street in the Hudson Square submarket.

In addition, Inventiv Health renewed and expanded at 450 West 15th Street in Chelsea, by taking 75,000 square feet.

Figure 13


Figure 14


Figure 15

Overall Vacancy

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Manhattan Q4 2012


Table 1

Leasing Fundamentals

Overall Vacancy Sublease Vacancy

Submarket Building Count

Square Feet Square feet Rate

Square Feet Rate

Net Absorption

Under Construction

Average Rent

City Hall 50 17,428,051 148,786 0.9% 3,154 0.0% 66,913 0 $42.65

Financial District 63 44,300,197 4,480,412 10.1% 510,118 1.2% 85,570 0 $40.83

Insurance District 38 12,863,563 651,695 5.1% 13,769 0.1% (8,614) 0 $37.00

Tribeca 25 8,443,070 465,097 5.5% 171,986 2.0% (17,336) 0 $46.68

World Trade Center 41 30,447,173 1,523,346 5.0% 181,658 0.6% 126,654 8,265,630 $37.27

Downtown 217 113,482,054 7,269,336 6.4% 880,685 0.8% 253,187 8,265,630 $41.45

Columbus Circle 78 34,327,691 3,154,825 9.2% 1,013,104 3.0% (37,052) 1,052,150 $59.21

Grand Central 118 53,915,301 5,120,389 9.5% 836,870 1.6% 179,030 0 $77.33

Murray Hill 64 13,610,569 639,863 4.7% 56,785 0.4% 156,817 0 $52.68

Penn Plaza/Garment 278 65,082,364 4,440,556 6.8% 421,461 0.6% 89,363 0 $52.40

Plaza District 215 83,213,079 6,695,127 8.0% 1,001,031 1.2% 248,644 0 $87.75

Times Square 87 44,823,601 4,281,341 9.6% 597,048 1.3% (69,971) 1,055,000 $67.97

U.N. Plaza 19 3,756,030 88,316 2.4% 0 0.0% (2,700) 0 $52.78

Midtown 859 298,728,635 24,420,417 8.2% 3,926,299 1.3% 564,131 2,107,150 $69.88

Chelsea 225 36,624,894 2,097,497 5.7% 113,810 0.3% 2,279 0 $50.06

Gramercy Park 111 24,007,667 865,298 3.6% 45,626 0.2% (435) 0 $47.09

Greenwich Village 36 5,105,939 486,140 9.5% 19,100 0.4% (111,673) 400,000 $47.77

Hudson Square 37 12,599,925 1,294,957 10.3% 0 0.0% 40,980 0 $44.02

Soho 56 6,171,732 229,222 3.7% 18,347 0.3% 8,454 0 $48.99

Midtown South 465 84,510,157 4,973,114 5.9% 196,883 0.2% (60,395) 400,000 $49.44

Class A 433 302,792,337 25,417,848 8.4% 4,154,704 1.4% 408,012 10,772,780 $70.15

Class B 689 142,822,809 7,796,149 5.5% 767,070 0.5% 100,298 0 $46.06

Class C 419 51,105,700 3,448,870 6.7% 82,093 0.2% 248,613 0 $40.36

Manhattan 1,541 496,720,846 36,662,867 7.4% 5,003,867 1.0% 756,923 10,772,780 $60.62

Manhattan Q4 2012


Table 2

Top Leasing Activity

Tenant Address, City Submarket Square feet Transaction Type

UBS 1285 Ave of the Americas Columbus Circle 830，000 Renewal

Microsoft 11 Times Sq Times Square 261,095 New

IPG 909 Third Ave Plaza District 220,359 New

Univision Communications 605 Third Ave Grand Central 136,000 Renewal

Nielsen 85 Broad St Financial District 115,207 New

Aon 299 Park Ave Plaza District 112,000 New

Cooley 1114 Ave of the Americas Times Square 111,000 Renewal

Hogan Lovells 875 Third Ave Plaza District 110,000 New

Medidata Solutions 350 Hudson St Hudson Square 98,585 New

Speyer Legacy School 400 W 59th St Columbus Circle 85,754 New

Table 3

Top Sales Activity

Address, City Seller Buyer Square feet Sale Price / PSF

1285 6th Ave Equitable Life Assurance AXA 1,749,000 $804.0m / $460

1440 Broadway Prudential RE Investors Rockpoint Group 740,000 $351.5m / $475

300 Park Ave AP2 Tishman Speyer JV National Pension Service

718,700 $326.9m / $455

220 W 42nd St Epic UK Ltd Paramount Group 227,685 $261.0m / $1,146

285 Madison Ave RFR Realty JV East End Capital JV GreenOak Real Estate

WPP Group 550,000 $189.3m / $344

Manhattan Q4 2012


Definitions Inventory: Existing Class A, B and C office properties

50,000 square foot minimum rentable base area Non-owner occupied, non-medical use

Overall Vacancy: Inclusive of vacant direct and sublease space

Net Absorption: The change in physical occupancy from one period to the next

Average Asking Rents: Office rents are reported as gross per square foot, per year Average asking rents are reported as direct Average asking rents are weighted against the overall rentable building area

Under Construction: Properties that are under construction as physically evident by ground work

Deliveries: Completed construction projects as evident by issue of certificate of occupancy Deliveries become part of inventory base

Leasing Activity: Completed lease executions that may impact future vacancy and net absorption

Sources: DTZ Research, Real Capital Analytics, CoStar Group, Bureau of Labor Statistics

Disclaimer: This report should not be relied upon as a basis for entering into transactions without seeking specific, qualified, professional advice. Whilst facts have been rigorously checked, DTZ can take no responsibility for any damage or loss suffered as a result of any inadvertent inaccuracy within this report. Information contained herein should not, in whole or part, be published, reproduced or referred to without prior approval. Any such reproduction should be credited to DTZ.

Manhattan Q4 2012


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Contacts

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DISCLAIMER

This report should not be relied upon as a basis for entering into transactions without seeking specific, qualified, professional advice. Whilst facts have been rigorously checked, DTZ can take no responsibility for any damage or loss suffered as a result of any inadvertent inaccuracy within this report. Information contained herein should not, in whole or part, be published, reproduced or referred to without prior approval. Any such reproduction should be credited to DTZ.

© DTZ January 2013

2012 q4 office manhattan

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