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MARKET REPORT

OFFICE
New York City Q2/19
Largest Pipeline in a Decade to Test Tight Office
Market in the Big Apple Office 2019 Forecast

Y-O-Y Average
Dynamic economy generating robust demand. Amid steady job growth Metro Vacancy Basis Point Asking Y-O-Y
Change
in the New York City metro, office-using firms have been rapidly leasing Change Rent
new office space. Net absorption registered more than 4.4 million square
feet in 2018, the highest pace since the high-water mark reached in 2014. Bronx 8.8% 60 $37.25 1.4%
When combined with a muted pipeline that has crossed 4 million square
feet just twice in the past five years, vacancy has remained subdued,
Brooklyn 11.9% 70 $39.00 1.8%
resting consistently below 12 percent since 2012. These factors have
contributed to the largest office construction pipeline in over a decade,
with more than 14.7 million square feet of space expected to be delivered Manhattan 11.0% 10 $66.50 3.0%
before year’s end. As a result, rent gains have proved more marginal than
previous years, barely outpacing the rate of inflation in most boroughs
as owners opt to lock up longer leases on more tenant-friendly terms to Queens 11.4% -60 $37.00 1.7%
avoid potential upswings in vacancy.

Staten Island 5.9% 70 $25.60 1.1%


Midtown Manhattan skyscrapers highlight considerable pipeline.
While development is on the rise throughout the metro, the vast ma-
jority of this year’s additions will be completed in Midtown Manhattan. Westchester County 14.2% -230 $26.00 0.5%
One Manhattan West, 30 and 55 Hudson Yards and Hudson Commons
together combine for more than 7 million square feet of premier office
space. Outside of Manhattan, the size and scale of projects remain con-
siderable, led by The Wheeler and Dock 72 in Brooklyn. In Queens, The
JACX, a mixed-use creative offering, highlights the rise of larger-scope
and larger-scale assets outside of core Manhattan neighborhoods, reach-
ing 1.1 million square feet. Investment Trends
• Transaction velocity and dollar volume remained elevated over the
past year, yet overall trading activity has begun to diminish as price
appreciation softened. Prime assets in Midtown Manhattan remain
Local Office Yield Trends the key driver of capital inflows, underpinned by properties priced in
th excess of $100 million as institutions seek out stable returns.
10.0%
• Yield-oriented investors are increasingly pursuing deals in Brooklyn
and Queens, where initial returns can be up to 100 basis points higher
8.5%
than similarly sized assets in Manhattan. Locations in Downtown
Average Rate

Brooklyn and Long Island City are the primary targets, benefiting
7.0%
from an existing corporate presence and stable tenant profile.

5.5% • Transactions in the Bronx and Staten Island are increasingly driven
by opportunistic deal flow due to the limited amount of existing
4.0% inventory. These special situations can provide an increase in returns,
* 01 03 05 07 09 11 13 15 17 19*
primarily through a combination of capital appreciation, better build-
ing management and entry cap rate.

Sales Trends
Sales Price Growth
* Cap rates trailing 12 months through 1Q19
per Square Feet

$800 36%
Sources: CoStar Group, Inc.; Real Capital Analytics
Year-over-Y

$600 18%
MANHATTAN

Current Trends 1Q19 – 12-Month Period

Employment Trends
EMPLOYMENT
Local Office Yield Trends
Employment Growth Office-Using Emp. Growth 2.1% increase in total employment Y-O-Y
6% 10.0%
• Over the past 12 months, New York City employers generated
Year-over-Year Change

3% 8.5% 93,300 new jobs, expanding total employment by 2.1 percent. This

Average Rate
represents a pace roughly in line with the prior year, when 96,400
0% 7.0% positions were added.

• The education and health services and professional and business


-3% 5.5%
services sectors contributed the bulk of new hiring, creating
-6% 4.0% 47,000 and 20,800 jobs, respectively.
09 10 11 12 13 14 15 16 17 18 19* 01 03 05 07 09 11 13 15 17 19*

Office Supply and Demand CONSTRUCTION


Sales Trends
Completions Absorption Sales Price Growth

10
5.2 million square feet completed Y-O-Y
Average Price per Square Feet

$800 36%

Year-over-Year Growth
• Over the past year, 5.2 million square feet of office space came
Square Feet (millions)

5 $600 18%
online, consisting primarily of 3 World Trade Center in Downtown
Manhattan and 55 Hudson Yards in Midtown.
0 $400 0%
• This year, more than 8.3 million square feet is expected to be
-5 $200 completed. The pipeline will be led -18%
by 30 and 55 Hudson Yards and
One Manhattan West. Together, these three projects will inject
-10 $0 -36%
09 10 11 12 13 14 15 16 17 18 19* 09 10 more
11 than136.37
12 14 million
15 16 square
17 18 feet
19* in Midtown Manhattan.

Vacancy Rate Trends


Manhattan New Your City
VACANCY
14% 10 basis point decrease in vacancy Y-O-Y

13% • Net absorption reached 4.9 million square feet during the past
Vacancy Rate

four quarters, contracting vacancy 10 basis points to 11.2 percent


12% as demand in Downtown Manhattan eclipsed 3.5 million square
feet following the opening of 3 World Trade Center.
11%
• All submarkets except Midtown registered vacancy declines.
10% The contraction was driven by Class B and C properties, where
09 10 11 12 13 14 15 16 17 18 19*
vacancy fell 80 basis points to 8.4 percent.

Asking Rent Trends


Manhattan New York City RENTS:
24%

1.1% increase in the average asking rent Y-O-Y


Year-over-Year Change

12%
• The average asking rent advanced 1.1 percent to $64.61 per
0% square foot, powered by robust improvement in Uptown and
Downtown Manhattan.
-12%
• Rent growth was propelled by Class A buildings, where prices rose 2.4
percent to $70.51 per square foot. Midtown South posted the stron-
-24%
09 10 11 12 13 14 15 16 17 18 19* gest gain, vaulting 6.4 percent to $81.89 per square foot.

s New York City * Forecast


Sources: CoStar Group, Inc.; Real Capital Analytics
Demographic Highlights

2019 Forecast Job growth Population Age 20-34* Sq. Ft. Per Office Worker*

Metro 1.3% Metro 29.5% Metro 422


U.S. Average 1.3% U.S. Average 20.6% U.S. Average 215

2019 Office-Using Job growth Population of Age 25+


Percent with Bachelor Degree+**
Metro 1.1%
U.S. Average 1.7% Metro 60.7%
U.S. Average 29.9% *1Q19
**2018

SUBMARKET TRENDS SALES TRENDS


Midtown Manhattan Assets Underpin Safety Trade
Lowest Vacancy Rates 1Q19
Employment Trends As Prices Moderate
Local Office Yield Trends
Employment GrowthY-O-Y Office-Using
Average Emp. Growth • During the past year, transaction velocity rose nearly 15 percent as
Vacancy Y-O-Y %
Submarket 6% Rate
Basis Point Asking
Change dollar volume
10.0% topped $13.9 billion, marginally below the $15.9 billion
Change Rent
reached in the previous yearlong period. Cap rates remain in the low-
Year-over-Year Change

3% to mid-4 percent
8.5% range.
Average Rate

Uptown 5.1% -160 $43.36 19.3% • The average price per square foot dipped marginally toward $950,
0% 7.0%
underpinned by moderately lower prices in Midtown Manhattan.
Greater deal flow near Grand Central skewed the average downward.
-3% 5.5%
Outlook: A softer pricing structure has begun to form as investors fret
Midtown South -6% 9.7% -60 $65.48 0.2% over the tremendous
4.0% amount of incoming supply. How the new supply is
09 10 11 12 13 14 15 16 17 18 19* 01 03 05 07 09 11 13 15 17 19*
absorbed will determine market conditions in the coming months.

Office Supply and Demand Sales Trends


Downtown 11.5% -90 $57.45 3.3%
Completions Absorption Sales Price Growth

10
Average Price per Square Feet

$800 36%
Year-over-Year Growth
Square Feet (millions)

5 $600 18%
Midtown 11.8% 40 $67.84 0.5%

0 $400 0%

-5 $200 -18%
Manhattan 11.2% -10 $64.61 1.1%
-10 $0 -36%
09 10 11 12 13 14 15 16 17 18 19* 09 10 11 12 13 14 15 16 17 18 19*

* Trailing 12 months through 1Q19 over previous time period


Sources: CoStar Group, Inc.; Real Capital Analytics
Vacancy Rate Trends
Manhattan New Your City

14%
BROOKLYN

Current Trends 1Q19 – 12-Month Period

Employment Trends EMPLOYMENT


Employment Growth Office-Using Emp. Growth 2.1% increase in total employment Y-O-Y
6%
• Over the past 12 months, New York City employers generated
Year-over-Year Change

3% 93,300 new jobs, expanding total employment by 2.1 percent. This


represents a pace roughly in line with the prior year, when 96,400
0% positions were added.

• The education and health services and professional and business


-3%
services sectors contributed the bulk of new hiring, creating
-6% 47,000 and 20,800 jobs, respectively.
09 10 11 12 13 14 15 16 17 18 19*

Office Supply and Demand Sales TrendsCONSTRUCTION


Completions Absorption Sales Price Growth
4 563,000 square feet30%completed Y-O-Y
Average Price per Square Feet

$600

Year-over-Year Growth
Square Feet (millions)

2
• Development contracted meaningfully over the past year, falling
$450 15%
from more than 1.24 million square feet to roughly 563,000 square
0 feet as builders slowed construction throughout the borough.
$300 0%

• More than 3.4 million square feet of office space is currently


-2 $150 -15%
underway in the borough, led by the Brooklyn Navy Yard project
and The Wheeler building, with both offerings exceeding 620,000
-4 $0 -30%
09 10 11 12 13 14 15 16 17 18 19* 09 10 square
11 12 feet.
13 14 15 16 17 18 19*

Vacancy Rate Trends


Brooklyn New Your City
VACANCY
16% 170 basis point increase in vacancy Y-O-Y
13% • Net absorption turned negative over the past year, hitting
Vacancy Rate

negative 365,000 square feet as vacancy rose 170 basis points to


10%
12.1 percent. The South Brooklyn submarket was most affected,
soaring 440 basis points to 17.3 percent.
7%
• Class A properties were under the most pressure, with vacancy
4% rising 620 basis points to 13.3 percent. Class B and C assets fared
09 10 11 12 13 14 15 16 17 18 19*
much better, ticking up 20 basis points to 11.7 percent.

Asking Rent Trends


Brooklyn New York City
RENTS:
26%

6.7% increase in the average asking rent Y-O-Y


Year-over-Year Change

13%
• The average asking rent vaulted 6.7 percent to $41.80 per square
0% foot as firms vacated higher-quality spaces.

• Class A average asking rents fell 5.1 percent to $54.03 per square foot,
-13%
while Class B and C properties recorded a 13.9 percent gain to $37.57
per square foot. Tenants remain extremely price conscious as rising
-26%
09 10 11 12 13 14 15 16 17 18 19* rents encourage property turnover.

s New York City * Forecast


Sources: CoStar Group, Inc.; Real Capital Analytics
Demographic Highlights

2019 Forecast Job growth Population Age 20-34* Sq. Ft. Per Office Worker*

Metro 1.4% Metro 24.9% Metro 405


U.S. Average 1.3% U.S. Average 20.6% U.S. Average 215

2019 Office-Using Job growth Population of Age 25+


Percent with Bachelor Degree+**
Metro 0.7%
U.S. Average 1.7% Metro 33.0%
U.S. Average 29.9% *1Q19
**2018

SUBMARKET TRENDS SALES TRENDS


Deal Flow Escalates as Investors Pursue Properties
Lowest Vacancy Rates 1Q19
Employment Trends In Downtown, North Brooklyn
Employment GrowthY-O-Y Office-Using
Average Emp. Growth • Transaction velocity doubled over the past year, fueled by
Vacancy Y-O-Y %
Submarket 6% Rate
Basis Point Asking
Change transactions just over the Brooklyn Bridge in Downtown Brooklyn.
Change Rent
Cap rates were broadly in the low-5 percent range, with premier
Year-over-Year Change

3% assets trading in the high-4 percent area.

• The average price per square foot reached above $415, underpinned by
Downtown Brooklyn0% 9.2% 120 $48.70 -0.6%
locations in Downtown Brooklyn. South Brooklyn properties posted
the strongest appreciation.
-3%

Outlook: Relatively higher cap rates and lower rental rates continue to
-6% draw investors from Manhattan in search of greater returns.
09 10 11 12 13 14 15 16 17 18 19*
North Brooklyn 11.1% -110 $35.44 -5.5%

Office Supply and Demand Sales Trends


Completions Absorption Sales Price Growth
4
Average Price per Square Feet

$600 30%
South Brooklyn 17.3% 440 $35.32 41.7%
Year-over-Year Growth
Square Feet (millions)

2
$450 15%

0
$300 0%

-2 $150 -15%
Brooklyn 12.1% 170 $41.80 6.7%
-4 $0 -30%
09 10 11 12 13 14 15 16 17 18 19* 09 10 11 12 13 14 15 16 17 18 19*

* Trailing 12 months through 1Q19 over previous time period


Sources: CoStar Group, Inc.; Real Capital Analytics
Vacancy Rate Trends
Brooklyn New Your City

16%
QUEENS 1Q19 – 12-Month Period

CONSTRUCTION Supply and Demand


Completions Absorption Vacancy
25,000 square feet completed Y-O-Y 1,400 12%

Square Feet (thousands)


• Over the past year, the pace of development declined dramatically,
700 10%
falling from more than 565,000 square feet to 25,000 square feet as

Vacancy Rate
the project pipeline dried up.
0 8%
• More than 1.88 million square feet of office space is currently
underway in the borough, underpinned by The JACX, a mixed-use -700 6%

office and retail project with more than 1.1 million square feet of
-1,400 4%
creative office space.
15 16 17 18 19*

VACANCY AND RENT: Investment Highlights:


Supply and Demand
350 basis point increase in vacancy Y-O-Y Supply and Demand
• Transaction Completions Absorption
velocity nearly doubled Vacancy
over the past year, fueled
• Net absorption of negative 1.2 million square feet vaulted by a sharp Completions Absorption Vacancy
200 jump in activity in Long Island City, Jackson
12%
vacancy up 350 basis points to 11.7 percent after ending the first

(thousands)
Heights1,400
and Flushing. Cap rates were broadly in the mid-5
12%
quarter of 2018 at 8.2 percent.

(thousands)
percent 150
range. 10%

Vacancy
700 10%
• The average price per square foot reached the mid-$350s as dollar
1.3%

Vacancy
decrease in average asking rent Y-O-Y

FeetFeet
100 8%
volume soared above $660 million.

RateRate
0 8%

Square
• The average asking rent declined 1.3 percent to $36.52 per
50 6%

Square
square foot, propelled by an 11.9 percent decline in Class B and C
-700 6%
properties to $26.84 per square foot. 0 4%
-1,400 15 16 17 18 19* 4%
15 16 17 18 19*

STATEN ISLAND
CONSTRUCTION Supply and Demand
Completions Absorption Vacancy
0 square feet completed Y-O-Y
200 12%
Square Feet (thousands)

• Over the past year, developers completed no new space, a trend that
has been in place since 38,000 square feet was brought to market in 150 10%

Vacancy Rate
the third quarter of 2016.
100 8%
• Two projects containing roughly 360,000 square feet of office space
will be delivered this year, headlined by the Corporate Commons III 50 6%
project at 1110 South Ave.
0 4%
15 16 17 18 19*

VACANCY AND RENT: Investment Highlights:


200 basis point decrease in vacancy Y-O-Y
• Deal flow remains limited, driven primarily by a lack of listings
• Net absorption reached 83,000 square feet, dramatically amid stable conditions. Cap rates were broadly in the mid-7
contracting vacancy to 6.1 percent as new demand filtered percent range.
directly into a tighter vacancy rate.
• The average price per square foot pushed $200, fueled by transac-
2.6% decrease in average asking rent Y-O-Y tions for assets containing less than 30,000 square feet.

• The average asking rent slipped 2.6 percent to $24.79 per square
foot as tenants absorbed the highest-quality space in the market.

* Trailing 12 months through 1Q19


Source: CoStar Group, Inc.
1Q19 – 12-Month Period BRONX

CONSTRUCTION
Supply and Demand Supply and Demand
Completions Absorption Vacancy Completions Absorption Vacancy
51,000 square feet completed Y-O-Y
1,400 12% 600 16%
Square Feet (thousands)

Square Feet (thousands)


• During the past four quarters, developers completed one project at
2111 White Plains Road containing 51,000 square feet of office
700 10% space, 450 12%

Vacancy Rate

Vacancy Rate
ending the construction drought in place since the second quarter
0 8% 300 8%
of 2016.

• One project-700is currently underway with an expected delivery


6% in 150 4%
2019. Known as Union Crossing, the mixed-use development at 825
E. 141st -1,400
St. will contain roughly 275,000 square feet of office
4% space. 0 0%
15 16 17 18 19* 15 16 17 18 19*

VACANCY AND RENT: Investment Highlights:


Supply and Demand Supply and Demand
140 Supply
basis point and Demand
decrease in vacancy Y-O-Y Supply and Demand
Completions Absorption Vacancy • Deal flow remained consistentAbsorption
Completions over the past year, yet dollar
Vacancy
Completions Absorption Vacancy
• Tenants 200
absorbed more than 205,000 square feet over12%
the past was Completions
volume1,500 roughly 50 percentAbsorption
lower as buyers Vacancy
focused
20%
on
1,400 12% smaller properties.
600 The average deal size fell from over16%
60,000
Square Feet (thousands)

Square Feet (thousands)


year, prompting a 140-basis-point drop in vacancy to 9.1 percent.
Square Feet (thousands)

Square Feet (thousands)


150 10% square1,000
feet to roughly 24,000. 18%
Vacancy Rate

700 10% 450 12%

Vacancy Rate
• The average price per square foot advanced broadly higher, reach-
Vacancy Rate

Vacancy Rate
0.1%
100 decrease in average asking rent Y-O-Y
0
8%
8%
500
ing the mid-$240
300
16%
range as buyers bid for assets with cap rates
8% in the

• The average asking rent ticked down slightly, sliding 0.1 percent low- to mid-6 percent range.
50 6% 0 14%
to $35.60-700
per square foot, even as demand remained exceptional.
6% 150 4%

0 4% -500 12%
-1,400 4% 0 15 16 17 18 19* 0%
15 16 17 18 19*
15 16 17 18 19* 15 16 17 18 19*

WESTCHESTER COUNTY
CONSTRUCTION
Supply and Demand Supply and Demand
Completions Absorption Vacancy Completions Absorption Vacancy
0 square feet completed Y-O-Y
200 12% 1,500 20%
Square Feet (thousands)

Square Feet (thousands)

• Over the past year, developers completed no new space, continuing


1,000 18%
a streak of limited
150 completions that extends back to 2015.10%
Roughly
Vacancy Rate

Vacancy Rate
30,000 square feet came online in the second quarter of 2017.
100 8% 500 16%
• The future pipeline remains sparse, with one project in
Valhalla representing
50 the only planned completion of 2019.
6%The 0 14%
122,000-square-foot offering will be located at 350 Columbus Ave.,
with Pepsi pre-leasing
0 the entire space. 4% -500 12%
15 16 17 18 19* 15 16 17 18 19*

VACANCY AND RENT: Investment Highlights:


230 basis point decrease in vacancy Y-O-Y • Bolstered by rapidly improving vacancy and higher cap rates,
• A dearth of new supply and net absorption that reached 1.07 investment activity in the county jumped above $325 million as
million square feet dramatically contracted vacancy, which fell investors pursued deals in White Plains, Yonkers and Hawthorne.
230 basis points to 14.5 percent. • Cap rates range from the low-6 to mid-8 percent range, depending
on asset quality and location. Prices per square foot average $200,
0.6% decrease in average asking rent Y-O-Y ranging up to $50 lower and nearly $200 higher.
• Despite exceptional net absorption, the average asking rent
ticked down 0.6 percent to $24.97 as quality space continues to
be absorbed in the market.

* Trailing 12 months through 1Q19


Source: CoStar Group, Inc.
1Q19* Office Acquisitions CAPITAL MARKETS
By Buyer Type
Cross-Border, By DAVID G. SHILLINGTON, President,
11.6%
Marcus & Millichap Capital Corporation
Other, 6.0%
Equity Fund • Ongoing trade concerns weigh on growth outlook; Fed plots next
& Institutions, 32.9% steps. Amid rising trade tensions between the U.S. and China and
slowing global growth, the outlook has turned more cautious. Mar-
ket volatility, along with a flight to safety trade, has flattened the
yield curve dramatically, with the 10-Year Treasury trading below
Private, 45.1%
Listed/REITs, 4.4% 2.2 percent. This has pushed the broader yield curve into inversion,
a closely watched precursor to a potential recession. Meanwhile,
many measures of the domestic economy remain buoyant, includ-
Office Mortgage Originations ing continued job and wage growth, historically low unemployment
By Lender and muted inflationary pressure. These conditions have prompted
a dichotomy, with Federal Reserve officials signaling more accom-
100%
modative policies. The impending end of quantitative tightening in
Percent of Dollar Volume

September, coupled with potential cuts to the Fed funds rate in the
75% Nat'l Bank/Int'l Bank
Reg'l/Local Bank second half of the year, highlight the shift in Fed policy. As a result,
50% CMBS long-term interest rates are likely to remain subdued, with Fed
Financial/Insurance policy leaning toward accommodation.
Pvt/Other
25%

• Conservative underwriting balances abundant marketplace


0% liquidity. While debt availability for office assets remains widely
14 15 16 17 18
available from a wide range of sources including local, regional and
* Trailing 12 months through 1Q19
national banks and insurance companies, sentiment surrounding
Include sales $2.5 million and greater the health of the economy has fallen somewhat in recent months.
Sources: CoStar Group, Inc.; Real Capital Analytics Lenders remain broadly cautious in underwriting, with loan-to-
value (LTV) ratios typically in the 55 to 70 percent range, depend-
ing on the borrower, asset and location. The conservative approach
National Office and Industrial Group
has filtered into a focus on proven property results, with much less
Alan L. Pontius
willingness to lend against pro forma rents. This has prompted
Senior Vice President, National Director | National Office and Industrial Group
Tel: (415) 963-3000 | al.pontius@marcusmillichap.com investors to turn toward short-term mezzanine debt and bridge
loans to cover capital improvements, while seeking long-term
Prepared and edited by solutions once returns have been solidified. Construction origina-
Aaron Martens tion remains muted, with lenders focusing on core locations with
Research Analyst | Research Services
proven demand.
For information on national office trends, contact:
John Chang
Senior Vice President, National Director | Research Services
Tel: (602) 707-9700 | john.chang@marcusmillichap.com
New York City Ottawa

Price: $250
J.D. Parker Executive Vice President of Investment Brokerage Mark
260 Madison Avenue 5th Floor New York, NY 10016
275 Ban
(212) 430-5100 | jd.parker@marcusmillichap.com
Ottawa
© Marcus & Millichap 2019 | www.MarcusMillichap.com
John Krueger Vice President/Regional Manager | Manhattan (613) 36
(212) 430-5100 | john.krueger@marcusmillichap.com

John Horowitz First Vice President/Regional Manager | Brooklyn


1 MetroTech Center, Suite 2001
The information contained in this report was obtained from sources deemed to be reliable. Every
Brooklyn, NY 11201
effort was made to obtain accurate and complete information; however, no representation, warranty (718) 475-4300 | john.horowitz@marcusmillichap.com
Philad
or guarantee, express or implied, may be made as to the accuracy or reliability of the information
Brooklyn Office
contained herein. Note: Metro-level employment growth is calculated based on the last month of the Sean
quarter/year. Sales data includes transactions valued at $1,000,000 and greater unless otherwise John Horowitz Vice President/Regional Manager 2005 M
1 MetroTech Center, Suite 2001 Brooklyn, NY 11201 Philade
noted. This is not intended to be a forecast of future events and this is not a guaranty regarding a
(718) 475-4300 | john.horowitz@marcusmillichap.com (215) 53
future event. This is not intended to provide specific investment advice and should not be considered
Manhattan Office
as investment advice.
John Krueger Vice President/Regional Manager
Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; CoStar Group, Inc.;
260 Madison Avenue, 5th Floor New York, NY 10016
Experian; Moody’s Analytics; Real Capital Analytics; TWR/Dodge Pipeline; U.S. Census Bureau (212) 430-5100| john.krueger@marcusmillichap.com
Phoeni

Ryan
2398 E

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