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STREET SMARTS
MHPNYC.COM
Q4 2016
WINTER IN MANHATTAN
Forecasters of all stripes should have learned a lesson in humility from 2016, a year where there were electoral upsets in the U.S. presidential election, the Brexit vote as well as championships for perennial underdogs the MLB Chicago Cubs and the NBA Cleveland Cavaliers.
2017 begins propelled by a strong economic tailwind. Final economic data for 2016 shows consumer confidence, with expectations for the economy hitting a 13-year high, and the Conference Board’s index hitting 113.7, up 19.6% from a year ago. The BEA’s final revision for Third Quarter 2016 GDP showed the national economy growing at 3.5%, and real gross domestic income gaining 4.8%. Corporate profits were up 2.1% for the year, to $2.1 trillion.
The stock market has surged since Election Day on the premise that tax cuts, deregulation, expanded defense spending, and greater infrastructure investment will spur economic growth in the year ahead. Such fiscal
stimulus will likely push GDP up, temporarily, within the constraints of a tight labor market. However, the bond market is already warning of a heightened risk of inflation. The Fed nudged interest rates up in December, and is widely expected to continue tightening monetary policy in the year ahead.
As has been the case since 2010, New York’s economy has been performing even better than the nation’s, whether measured by gross product, employment gains, or inflation. City private sector employment grew by 1.9% through October (the latest available data), smartly above the 1.6% for the U.S. The city’s job growth was broad, with only financial services slipping (by 2,200 jobs) during the year, though the securities sector posted a modest gain of 400 jobs. Professional and business services jobs were up by 11,400; the information sector rose by 2,700. Even manufacturing eked out a gain of 200 jobs. The citywide unemployment rate dropped to 5.4%, down from 5.9% a year ago.
US ECONOMY IN ZONE OF MODERATE GROWTHWITH SOME FISCAL STIMULUS IN SHORT RUN
8%
6%
4%
2%
0%
-2%
-4%
-6%
PERCENT CHANGE FROM PREVIOUS YEAR
GDP NON-FARM EMPLOYMENT
1990
1993
1996
1999
2002
2005
2008
2011
2014
2017
FORECAST GDP FORECASTJOBS
NEW YORK CITY OUTPACING U.S.ON MOST ECONOMIC MEASURES
Data as of December 2016; Source: NYC Comptroller’s Office
0 1 2 3 4 5 6
GCP/GDP Growth
Jobs Growth
Inflation Rate
Unemployment Rate
ANNUAL PERCENTAGE CHANGE
■ U.S.
■ NEW YORK CITY
YIELD CURVE SHOULD TREND UPWARD IN 2017WITH GREATEST MOVE IN INTERMEDIATE MATURITIES
Sources: 12/8/16 rates from Federal Reserve H.15 Report;Forecast by Hugh Kelly Real Estate Economics
TREASURY YIELD TO MATURITY, IN PERCENT DEC. 8, 2016 DEC. 2017 (FORECAST)
0.0
0.5 1.0 1.5 2.0 2.5
3.0
3.5 4.0 4.5
1 Month 3 Month 6 Month One Year Two Year Three Year
Five Year Seven Year
Ten Year 20 Year 30 Year
CUMULATIVE TOTAL RETURNS FOR NEW YORK OFFICES50 PERCENT HIGHER THAN US NORM SINCE 2000
Index based on NCREIF annual total returns, as of 3Q 2016
600
500
400
300
200
100
02000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
INDEX: 2000 VALUE = 100 NEW YORK U.S.
Changes in Federal policy under the new Trump administration are expected to alter the outlook only slightly in 2017. Tax cuts and deregulation are generally viewed as favoring New York, with its large number of high-income households and as a center of corporate finance. Trade restrictions, however, are detrimental to a city like New York which thrives on the flow of goods and capital. Demographically, immigration has been the main driver of New York’s population growth and the New York City Comptroller’s office has stated that “without immigrants, the NYC economy will face stagnation and decline.”
Office building transaction volume in Manhattan slowed during 2016, reflecting an overall trend in the U.S. This is not necessarily bad news, since it is reflecting a discipline in the marketplace that was sadly lacking a decade ago. Prices per square foot actually rose by 9% year-over-year in Manhattan by the end of 2016, a steeper gain than the U.S. as a whole, which posted a six percent increase in office
pricing. The average cap rate in Manhattan dropped to 3.9%, which seems irreducibly low and reflects the high quality of the assets traded. For the nation, the mean cap rate in the Fourth Quarter of 2016 was 250 basis points higher, at 6.4%. Institutional investors, cross-border investors, and private equity alike see Manhattan as a magnet for capital as well as for talent, and the cumulative total return for office
NEW DELIVERIES ELEVATE CLASS A VACANCYDURING LEASE-UP PHASE; OLDER SPACE PROVIDESOPTIONALITY FOR TENANTS
Source: CoStar
PERCENT VACANCY 12
10
8
6
4
2
0
DOWNTOWN MIDTOWN MIDTOWN SOUTH
CLASS A CLASS B CLASS C TOTAL MARKET
AFTER A YEAR OF ROUGH RENTAL PARITY, CLASS AAND B OFFICE RENTS DIVERGED IN SECOND HALF OF 2016
Source: CoStar
$75.00
$70.00
$65.00
$60.00
$55.00
$50.00
$45.002014 Q1 2014 Q2 2014 Q3 2014 Q4 2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1 2016 Q2 2016 Q3 2016 Q4
RENT PER SQUARE FOOT CLASS A CLASS B
MANHATTAN OFFICE VACANCY AT 8.1%REFLECTING 1.2 MILLION SF OF NET ABSORPTION
IN 4TH QUARTER
OVERALL MARKET VACANCY, IN PERCENT
ANNUAL DATA QUARTERLY DATA
1997
2001
2012
q3
2003
q3
2006
q3
2007
q3
2004
q3
2005
q3
12
10
8
6
4
2
0
2008
q3
2010
q3
2009
q3
2011
q3
2013
q3
2014
q3
2015
q3
Source: CoStar
REFLECTS MOST RECENT REVISIONS TO THE DATA SERIES AS OF 12/31/16
2016
q3
HUDSON YARDS DEVELOPMENT PROMISESGREATEST INVENTORY EXPANSION SINCE MID-80S
20181614121086420
MILLIONS OF SQUARE FEET (COMPLETIONS)
19821984
19861988
19901992
19941996
19982000
20022004
20062008
20102012
20142016
2018
Source: CoStar
SUMMARY MARKET STATISTICSby Office Building Class
Source: CoStar Year-end 2016 Manhattan Office Report
■ CLASS A ■ CLASS B ■ CLASS C
CLASS A: 466 buildings 328 million sq. ft. total Vacancy 9.0% Average Rent $72.34 psf
CLASS B: 1,374 buildings 160 million sq. ft. total Vacancy 7.4% Average Rent $61.81 psf
CLASS C: 1,926 buildings 71 million sq. ft. total Vacancy 5.6% Average Rent $54.73 psf
Continued on back
MHP has bought and
sold over $12 billion
worth of commercial
real estate. MHP
currently owns, leases
and manages over
5 million square feet
of first-class office
space, and features
a 50 person strong
tenant rep practice
specializing in office,
retail and sales. As
a full service firm,
with in-house leasing,
sales, management,
and project/buildout
capabilities, MHP has
garnered a reputation
in New York for
quickly transforming
properties into
profitable investments.
This 45 year track
record has enabled
MHP to establish long
term partnerships
with leading financial
institutions, pension
funds, and other
commercial lenders.
On a global scale,
MHP provides its
clients with access to
opportunities in over
200 major markets as
the New York affiliate
of TCN Worldwide.
To subscribe to our quarterly STREET SMARTS newsletter, contact: Edna Lassiter, elassiter@mhpnyc.com / 212.944.4747 or your exclusive MHP broker
Editorial Development: Hugh F. Kelly. Production: Alexander Scott Graphics Copyright © 2017 MHP Real Estate Services LLC. All rights reserved.
Continued from page 3
buildings here has been 150 percent of the national average yield since 2000.
Even with the new generation of office properties coming to market, Manhattan vacancy remained strong at 8.1%, thanks to net absorption of 1,213,780 square feet in the Fourth Quarter. Major sports leagues, including Major League Baseball and the National Hockey League were among the top tenants signing leases during the final three months of 2016. This is a great reminder that sports and entertainment are a major export industry for New York City, bringing substantial income into the city and having a significant multiplier effect across other sectors. Law firms such as Milbank Tweed are inking deals in Hudson Yards, and WeWork continues to contract for space which it then rents out to the ‘gig economy.’
One change on the horizon worth noting is the volume of completions now scheduled for 2018 and 2019. Manhattan has not seen two consecutive years of deliveries in excess of four million square feet since the mid-1980s. Tenants took advantage of the very narrow spread in Class A and Class B rents from early 2015 to mid-2016. But now the market is seeing the historical premium for Class A offices reassert itself. When roughly ten million square feet of new space comes to market in 2018-2019, though, we may see that rent gap narrow once again.
MANHATTAN OFFICE PRICING TRENDSCONTINUE TO OUTPERFORM OTHER CITIES
Source: Real Capital Analytics, as of Fourth Quarter 2016
1,000
900
800
700
600
500
400
300
200Q1 ‘13 Q1 ‘14 Q1 ‘15 Q1 ‘16
MANHATTANUNITED STATES
MANHATTANUNITED STATES
AVE PRICE $ PER SF
7.5%
7.0%
6.5%
6.0%
5.5%
5.0%
4.5%
4.0%
Q1 ‘13 Q1 ‘14 Q1 ‘15 Q1 ‘16
AVG CAP RATE (YIELD)
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