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State of the New York City Nonprofit Real Estate Market

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JANUARY 2016

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EXECUTIVE SUMMARY

The team at Denham Wolf is committed to serving New York City’s nonprofits.

Throughout our 18-year history, we have empowered hundreds of organizations to more effectively realize their missions by providing clarifying guidance about the real estate market. With every new partnership, we expand our insight into this market and deepen our capacity to serve the nonprofit community.

Over the past two years, New York City experienced a 9% growth in base rent for office space, and this trend is expected to continue in 2016. While charitable giving is also on the rise, rapid rent increases are outpacing this growth, stretching nonprofit budgets to their limits. Rent is typically the second highest expense for nonprofits, making the effective management of occupancy costs essential to organizational success.

As a result, many nonprofit leaders are currently asking themselves tough questions: Should I allocate more of my budget towards occupancy expenses? Or is there a lower-rent option available elsewhere? How many more members of my growing staff will fit in our current space?

Can we still effectively serve our beneficiaries if we relocate to a different neighborhood? Concerns like these are underscored by several related factors, such as the City’s shrinking availability of nonprofit-friendly space.

This report offers insights into the financial implications of real estate decisions for nonprofits, particularly those that lease their space. It includes information about the current economic climate and its impacts on charitable giving, both by individuals and foundations. We have also distilled key details about New York City’s building supply, the factors that influence occupancy costs, and some of the ways that nonprofits can successfully navigate the real estate market. We welcome the opportunity to further explore these trends – and the opportunities that exist for today’s nonprofits – with you.

Paul Wolf, Co-PresidentDenham Wolf Real Estate Services, Inc.

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The New York City economy has experienced tremendous growth since the Global Financial Crisis. As of 2014, the Gross Metropolitan Product (GMP) of the New York metro area stood at $1,559 billion, growing at a compound annual growth rate (CAGR) of 2.9% from 2007. In the first three quarters of 2015, the New York City real Gross City Product (GCP) increased by an average of 3.1% quarter over quarter (q-o-q). Among other factors, rapidly expanding technology and information have played a significant role in this recent economic expansion.

Charitable giving is highly correlated to economic output, and charitable donations have increased in line with the recent strengthening of the economy. According to the Nonprofit Research Collaborative’s most recent Fundraising Survey, 59% of nonprofits surveyed experienced an increase in funds raised for the first half 2015, up from 52% in the first half 2014. In a correlated trend, the number of organizations that expected to reach their annual fundraising targets increased 5.7% from 2014 to 2015.

Much of this movement was due to increases in individual charitable donations. According to Giving USA’s Annual Report on Philanthropy for the Year 2014, Americans donated over $350 billion to charitable organizations across the country in 2014, the highest total annual amount on record. This same report shows that charitable donations rose 7.1% year over year (y-o-y) in 2014 and averaged 5.5% y-o-y growth from 2010 to 2014. In 2014, nonprofits dedicated to arts and culture and to the environment were the sectors that

experienced the largest increases in fundraising from charitable donations, with growth of 9.2% and 7% y-o-y, respectively. The only nonprofits to see a decline in donations during this same period were those dedicated to international affairs, with donations falling 2%.

Major foundations are also an important source of fundraising, and New York State ranked first in the nation for charitable donations from major foundations in 2014, according to the New York City Economic Development Corporation’s December 2015 Economic Snapshot. Many major New York City-based foundations – such as The Rockefeller Foundation, Ford Foundation, Doris Duke Charitable Foundation, and the Robin Hood Foundation – contributed significantly to this outcome.

Residents in the New York metro area also gave generously in 2014, donating an average of $1,669. According to the NYCEDC’s December 2015 Economic Snapshot, this amount represents an increase of 17% over ten years, based on 2004 inflation adjusted dollars.

ECONOMY

Economic growth spurs uptick in charitable giving.

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Gross Metropolitan Product, New York Metro Area (in Billions)

National Charitable Giving (in Billions)

$2,000

$1,600

$1,200

$800

$400

$0

2006 2007 2008 2009 2010 2011 2012 2013 2014

$400

$300

$200

$100

$0

CHARITAB LE G IVING & ECONOM IC OUTPUT

Source: Bureau of Economic Analysis, Giving USA, Denham Wolf Research

CHARITAB LE G IVING BY S EC TOR

2014 Amount(in Billions)

Growth(Y-O-Y)

Arts/Culture/Humanities $17 9.2%

Education $55 4.9%

Environment/Animals $11 7.0%

Health $30 5.5%

Public-Society Benefit $26 5.1%

International Affairs $15 - 2.0%

Foundations $42 1.8%

Religious $115 2.5%

Human Services $42 3.6%

Source: Giving USA, Denham Wolf Research

GRO

SS M

ETRO

POLI

TAN

PRO

DU

CT

NA

TIO

NA

L C

HA

RITA

BLE

GIV

ING

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SUPPLY

Over 33 Million SF of nonprofit preferred office stock in NYC.

Based on the firm’s extensive experience in New York City transactions, Denham Wolf has identified 60 buildings within the five boroughs that house a high density of nonprofits and/or possess key characteristics that nonprofits seek for their spaces. These buildings are located near transportation and population hubs, are the most professional and affordable within their building class, and support the logistical needs of high-traffic programs. These 60 buildings currently comprise over 33 million square feet of rentable building area (RBA) throughout New York City.

One of the highest density nonprofit buildings in the city is 520 8th Avenue. With its proximity to Penn Station and the Port Authority Bus Terminal, high quality management, civic-minded ownership, capacity to handle high-traffic program uses (through multiple elevator bays and efficient security systems), and professional and affordable spaces, the building attracts a wide range of nonprofits.

Location: Penn Plaza/Garment DistrictClass: BAsking Rent: $46 per SFVacancy Rate: 2%Largest Tenants: ASPCA, Mason Tenders District

Council, Selfhelp Community ServicesCurrent as of 4Q15

520 8TH AVENU E

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Rent is often an organization’s second highest expense, making it a substantial portion of a nonprofit’s operating budget. Recent data collected by GuideStar about New York City nonprofits showed that occupancy costs accounted for 7% of total operating costs, on average, over the four most recently reported years.

The data also showed that the ratio of occupancy costs to total operating costs varied across the surveyed organizations. Those with a higher ratio tended to be venue dependent, wherein the nature of a nonprofit strictly limits its location due to real estate-intensive programs. This may be due to the limited size or limited number of available facilities in a neighborhood, both of which influence the size of the community that the nonprofit can serve and subsequently the amount of funding that can be generated through programming. For some organizations, highly visible and accessible program space is required, leading those tenants to more expensive retail facilities.

For venue-dependent nonprofits – including certain schools, health care facilities, and theaters – occupancy costs can account for more than 25% of total expenses. Since this is notably higher than the 7% average in the Guidestar study sample, high densities of venue-dependent nonprofits can skew averages for specific regions. For example, the real estate prices in the Bronx are generally lower than those in Manhattan, but there is high density of venue-dependent nonprofits in the borough, and these organizations spend a disproportionally large portion of their budget on real estate.

Across the Guidestar study sample, which includes both venue-dependent and non-venue-dependent nonprofits, organizations located in Queens and Staten Island had the lowest occupancy costs. On average, less than 5% of their expenses were spent on real estate-related costs.

Similarly, occupancy costs to expense ratios also vary from sector to sector. In recent years, nonprofits dedicated to human services have seen the highest ratios; this trend is likely to continue considering the sector’s high proportion of venue-dependent organizations.

OCCU PANC Y COST S BY BOROUG H

Percent of total Expenses

Bronx 9.7%

Brooklyn 7.5%

Manhattan 6.9%

Queens 4.7%

Staten Island 4.5%

OCCUPANCY COSTS

Occupancy costs account for 7% of annual budgets.

Source: GuideStar, Denham Wolf Research Note: Analysis applies to NYC-based nonprofits with revenues between $0.5 and $20 million, and excludes large housing and medical service providers.

Source: GuideStar, Denham Wolf Research Note: Analysis applies to NYC-based nonprofits with revenues between $0.5 and $20 million, and excludes large housing and medical service providers.

OCCU PANC Y COST S BY S EC TOR

Percent of total Expenses

Human Services 9.2%

Health 8.0%

Public-Society Benefit 7.8%

Arts/Culture 7.4%

Education 7.4%

Religion (non-worship) 6.5%

Foundations 4.9%

International Affairs 4.8%

Environment/Animals 3.7%

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RENT AND VACANCY

In nonprofit preferred buildings, rents are rapidly rising.

Looking at the aggregated data of the 60 buildings identified by Denham Wolf as nonprofit preferred buildings, rents have grown by nearly 30% across all building classes from 2011-2015. Rising rents are partly attributable to New York City’s increasing number of well-funded companies in the technology, advertising, media, and information (TAMI) sector. According to the New York City Economic Development Corporation, the number of employees working in these types of organizations increased by 26.7% from 2003 to 2014. TAMI organizations often seek to locate in non- traditional office spaces, such as the loft-like spaces that nonprofits have historically occupied, creating more competition for the City’s supply of nonprofit preferred buildings.

In addition, the rate at which New York City office rents are growing is currently increasing. For the nonprofit preferred buildings identified by Denham Wolf, rents have grown at a compound annual growth rate (CAGR) from 2011-2015 of 6.3% overall, and the majority of that growth happened in the last two years. The CAGR from 2013-2015 was 9.1%, nearly three times faster than the CAGR from 2011-2013.

The robust demand for space is reflected in the steady decline in class A and C vacancy rates since 2010. As of the fourth quarter of 2015, vacancy rates for these buildings is below 4%. As a result, it is more challenging to find affordable space in these buildings; however, class B office space continues to have slightly higher availability.

In recent years, many nonprofits seeking to lower their occupancy costs have considered relocating to Upper Manhattan or the outer boroughs, where it is possible to find rents ranging from the low $20s to the low $30s per RSF. In contrast, buildings within our nonprofit preferred building set that are located in Manhattan have an average rent of $52 per RSF. As a specific example, 57 Willoughby Street in Downtown Brooklyn asks $28 per RSF, while 40 Worth Street in Tribeca has an asking price of $55 per RSF. All indicators suggest that these rate discrepancies will continue between Manhattan and the outer boroughs.

NON PROFIT PRE FE RRE D B U ILDING VAC ANC Y R ATE S AN D A S K ING RE NT S , BY CL A SS

Overall Class A Class B Class C

Current Vacancy Rate 4.9% 3.7% 6.9% 3.2%

Current Rent per SF $51 $56 $44 $39

CAGR (2011-15) 6.2% 6.1% 6.2% 7.6%

CAGR (2011-13) 3.4% 2.3% 5.2% 6.3%

CAGR (2011-15) 9.1% 10.1% 7.2% 8.8%

Source: CoStar, Denham Wolf Research Note: CAGR refers to Compound Annual Growth Rate, the average year-on-year financial growth of an asset over time.

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$60

$55

$50

$45

$40

$35

$30

$25

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

A S K ING RE NT BY CL A SS , A MONG NON PROFIT PRE FE RRE D B U ILDINGS

10 %

9 %8 %7 %6 %5 %4 %3 %2 %1 %0 %

VAC ANC Y R ATE BY CL A SS , A MONG NON PROFIT PRE FE RRE D B U ILDINGS

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

4 Q15 RE NT AN D VAC ANC Y, A MONG NON PROFIT PRE FE RRE D B U ILDINGS

$60

$50

$40

$30

$20

$10

$0

Manhattan Brooklyn Bronx

8 %7 %6 %5 %4 %3 %2 %1 %

0 %

A

B

C

A

B

C

Rent per SF ($) Vacancy Rate (%)

Source: CoStar, Denham Wolf Research Note: Rents are listed per SF.

Source: CoStar, Denham Wolf Research

Source: CoStar, Denham Wolf Research

REN

T PE

R SF

VA

CA

NC

Y R

ATE

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OUTLOOK

Occupancy costs expected to rise.

With both national and local economic outlooks still healthy, philanthropy in 2016 is expected to witness robust growth. However, rents in 2016 and 2017 are likely to outpace this growth for many New York City nonprofits. As a result, organizations are likely to see an increase in their occupancy costs as a percentage of their overall budget. Over the next 18 months, this increase will continue to force many nonprofits to consider major budget reductions, such as reducing office sizes and/or changing locations.

By starting the careful examination of operating expenses early, particularly expenses related to real estate needs, nonprofits have an opportunity to manage the forecasted growth in rents. Looking forward, it will remain possible to work in a highly desirable area of the city while also meeting financial and spatial requirements. However, the process may become more challenging, requiring additional patience, planning, and expertise.

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• In January, Global Literacy Partners took up 5,550 SF at 19 W 21st Street. Asking rent was $50 per RSF.

• In January, New York Restoration Project renewed at 254 W 31st Street, at a below market rent rate.

• In February, the International Center of Photography downsized from a 25,400 SF space at 1114 Avenue of the Americas to move into an 11,000 SF condo at 250 Bowery, purchased for $23.5 million.

• In March, Gelsey Kirkland Academy leased 20,000 SF at 29 Jay Street. Asking rent was $50 per RSF.

• In March, the Association of National Advertisers signed a 17,865 SF lease at 708 Third Avenue. Asking rent was $55 per RSF.

• In June, The Church of St Luke in the Fields entered into a 49 year lease for 40,000 SF of space and 20,000 SF of development rights with St. Luke’s School, in a below market transaction designed to help the school gain financial independence.

• In July, the New York Road Runners signed a lease for 7,235 SF of retail space at 320 West 57th Street. Asking rent was $150 per RSF.

• In July, the Screen Actors Guild negotiated an early termination of their 25,000 SF lease at 360 Madison Avenue, saving the organization 40% of their remaining lease obligation.

• In August, the Doe Fund subleased 10,000 SF of space to Kings Country Distillery at 173 Cooks Street for the remaining 12 years of their lease.

• In October, GLSEN signed a 11,400 SF lease at 110 William Street. Asking rent was $50 per RSF.

• In November, the Committee for Hispanic Children and Families moved out of 110 William Street and into a 9,400 SF space at 75 Broad Street. Asking rent was $45 per RSF.

RECENT TR ANSACTIONS IN NEW YORK CITY

Select nonprofit leasing transactions in 2015.

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212 736 67 7 7 | DENHAMWOLF.COM

Denham Wolf Real Estate Ser vices 520 Eighth Avenue, 25th Floor New York , NY 10018

JONATHAN DENHAM Co-President jdenham@denhamwolf.com | x223

PAU L WOLF Co-President pwolf@denhamwolf.com | x222

Denham Wolf is the leading integrated real estate firm serving the nonprofit community through planning, transaction, and project management services.

We believe an organization’s mission and programs should drive real estate projects, and this principle guides everything we do.