High Office Leasing Activity Couldn’t Match Massive New Supply In Q3

Q3 2016’s come to a close, and NYC’s office market has remained strong. Research reports from Colliers International, JLL, Avison Young and Cushman & Wakefield, however, reveal that record leasing activity levels still can’t keep up with the market’s supply flood.

Demand And Leasing Activity

Manhattan's leasing totaled 2.6M SF last month, per C&W, bringing year-to-date activity to 20.5M SF. Third-quarter leasing reached 6.9M SF, higher than the long-term quarterly average of 6.5M SF. Colliers said Q3 leasing was at 8.2M SF, a 0.7% increase from Q2.  

Colliers executive director Craig Caggiano said the difference could be due to a variety of factors, including the borders and inventory sizes used, the types of offices and leases included, the data sets used (CoStar, Xceligent, etc.) and even the information brokers provided internal research teams. Colliers’ report, for example, called Coach’s 694k SF sale-leaseback at 10 Hudson Yards (pictured) the quarter’s largest transaction, while neither JLL nor C&W made note of it.

The market’s strong demand and activity is clear. Avison Young notes Q3 is usually the slowest quarter in a year, thanks to vacations in July and August, and this year is no exception. But, the firm notes, the massive demand is keeping the office market in equilibrium, rather than causing a contraction.

Employment

More than 89,000 new private sector jobs were added to NYC between August 2015 and August 2016, a 2.4% increase, higher than the 1.9% national gain during the same period, according to Colliers. The 27,900 jobs added in July and August largely came from the educational and health services sectors.

Unemployment rested around 5.6%. Although this is under the pre-recession peak of 5.9% in August 2008, it's high compared to US's 4.9% rate. 

Absorption

Overall, Manhattan year-to-date absorption has been positive, at 2M SF, C&W reports. At 1.8M SF, Midtown represented nearly 92% of Manhattan’s positive absorption. Midtown South also had a positive absorption (371k SF), while a new block of space at 32 Old Slip (pictured) drove Downtown’s absorption to negative 210k SF. 

Colliers reports that blocks of space added to Midtown and Midtown South kept absorption flat at negative 0.31 MSF, with the year-to-date absorption also negative at -2M SF.

Vacancy

Vacancy throughout the city rose as new spaces outpaced activity. These spaces were centered around Midtown, which, although it had the highest leasing activity for the quarter and nine of the quarter's 11 large block leases, has seen its vacancy rate increase for 11 of the past 12 months.

Midtown South also saw small increases in vacancy, and its sublease vacancy rate has increased six straight quarters. It even recorded its lowest quarter of activity since Q1 2009. Its vacancy remains relatively tight, hovering around 7%, Avison Young notes.

Downtown, which saw the only decline in vacancy from last quarter (excluding 32 Old Slip), can’t be considered a bright spot either, as most of the quarter’s leases were relocations from other Downtown offices, meaning the vacancy decrease is temporary. 

Lease Types 

Renewals made up most of the quarter’s activity. Penguin Random House renewed and expanded its stake at 1745 Broadway to 604k SF. Law firm Dentons renewed for 191k SF at 1221 Avenue of the Americas, Morgan Stanley renewed and expanded at 399 Park Ave for 108k SF, and Bloomberg expanded to 204k SF at 919 Third Ave. In Midtown South, Alibaba expanded onto an additional floor at 860 Washington St after signing its lease last quarter.

There were also some impressive new leases. 4 Times Square (pictured) secured its first leases following Condé Nast’s departure and Skadden’s relocation, with ICAP and Fross Zelnick Lehrman & Zissu signing for a combined 123k SF. Winton Capital is relocating from 375 Park Ave into 35k SF at 315 Park Ave South. Downtown’s largest lease was the NYC Department of Finance’s impending move to 183k SF at the former Verizon Data Center (375 Pearl St).

The quarter’s most notable leases were signed at Hudson Yards and WTC. MarketAxess is relocating from 299 Park Ave to 83k SF at 55 Hudson Yards, while DNB ASA’s relocating from 200 Park Ave to 44k SF at 30 Hudson Yards.

4WTC saw Downtown’s second-largest lease of the quarter with Zurich American Insurance’s 132k SF deal on the tower’s 52nd through 54th floors. Global Atlantic Financial Group and Validus also signed leases at the tower, taking 45k SF and 24k SF, respectively. (All three of these, however, were relocations from other Downtown sites.)

Rents And Concessions

The most notable (and possibly worrying) trend is the correlation between rising rents and the increasing frequency of concessions. JLL believes this signifies rents rising solely as highly expensive spaces hit the market, rather than on a building-by-building basis.

Midtown South is the best example of this, with average asking rent surging 79% since 2009 and up $1.52/SF from last quarter, but the growth has been mainly fueled by One SoHo Square and 860 Washington St. Downtown Class-A asking rents also declined due to the WTC leases taking pricier space off the market. 

Colliers—which noted Manhattan asking rents are at record highs of an average $73.85/SF, 0.7% above the $73.31/SF peak from Q3 2008—agreed concessions were on the rise and could be a sign of things to come.

"We don't have a crystal ball," Craig told Bisnow, "and we don't think the recovery is just going to peter out unless some major market disruption happens, but [the rise in concessions] is definitely something we're keeping our eye on."