New York Real Estate and Office Markets
NEW YORK CITY OFFICE MARKET
New York is one of the premiere metropolitan areas of the world, exerting a significant impact on global commerce, finance, media, art, fashion, research, technology, education, and entertainment. The home of the United Nations Headquarters, New York City is an important center for international affairs and is widely deemed the cultural capital of the world. With its unmatched scope of building types, diverse tenant base and extensive transportation system, the city has earned an iconic and prominent place in the global market.
The borough of Manhattan serves as its hub and is the nation’s largest single office market with 450 million square feet of space (Brown, 2007). Its office inventory is greater than the next five largest U.S. markets combined and features some of the world’s most iconic properties (Beauregard, 2005). This paper explores the current state of office market conditions in New York — specifically Manhattan — and takes a closer look at the impact of 9/11, urban renewal and revitalization, and implications for the future.
Current Office Market Conditions
In the first quarter of 2012 asking office rents for Manhattan stood at $58.96 per square foot, an increase of 7.7% from 2011 (Toy, 2012). The increase is credited to the addition of over 36,000 office using jobs and increased leasing volumes as a result of pent up demand from the recession. Many tenants are now seeking to take advantage of the impending bottom of the rent cycle. Nearly 60% of the leasing activity and absorption in Manhattan occurred in early 2012 (Toy, 2012).
As the U.S. debt ceiling led to certain declines in financial markets, firms paused and announced layoffs and decreasing payrolls (Gong & Keenan, 2012). Weakness in the national and global economy has impacted deal flow. Many companies have put transactions on hold until tenants get a better sense of where the market is headed. In addition, the presidential election of 2012 may continue this stall until certainty returns to the market place. The increased uncertainty and soft market led to a slowdown in new leasing, though not a full collapse. The overall vacancy rate may continue to decline and very little new construction is anticipated. Asking rents tend to rise when vacancy is falling, particularly as the economy struggles. As vacancy rates fall below 9.0% towards the end of 2012, rents will increase further and faster (Toy, 2012).
For a full recovery, the financial services sector in New York needs to remain healthy, but there are a few concerning indications (Gong & Keenan, 2012). Sublease space from financial firms and others has appeared on the market, though relatively small. This is thought to be the result of a number of individual businesses folding or relocating rather than an all-out trend (Malcata-Rebelo & Pinho, 2010). In addition, the completion of the two buildings at the World Trade Center site is highly anticipated within the next two years. If the economy falters, the Downtown market faces more challenges than other market segments, though it has been healthier than forecasted (Toy, 2012).
An economy wrought with rising oil prices, slow consumer spending, shaky global stability and uncertainty about taxes can all have a negative impact on the prosperity of the office market (Malcata-Rebelo & Pinho, 2010). Such factors are viewed as risks and make businesses more cautious. Occupiers in New York are seeking to increase the efficiency of their real estate occupancy by reducing the amount of space occupied per person. The outcome will be smaller amounts of office space being absorbed than in the past.
Impact of 9/11
The destruction of the World Trade Center of September 11th had several effects on the economy and office market of New York. First, and most horrific, the attack cost nearly 2,800 lives. In addition, the terrorist attack occurred just as the recession was getting underway in the nation and the city. All factors combined — along with pre-existing unemployment concerns — had a direct effect on the real estate markets in New York (Gong & Keenan, 2012). The lower Manhattan market tightened due to the sudden loss of supply. The attack destroyed or rendered unusable nearly 28 million square feet of class A office space — 13.4 million of which was in the WTC complex itself (Tarquinio, 2008). The Midtown office market tightened as well, but not much since many tenants were locating elsewhere, downsizing their space and some firms were simply obliterated (Pristin, 2009). Some companies were forced to split up their operations since very large office space allotments were hard to find.
Of the companies that decided not to return to Lower Manhattan after 9/11, the majority relocated to Midtown Manhattan. Together, the core markets of Midtown and Downtown Manhattan captured about 80% of displaced tenants after the terrorist attack, while outlying areas captured only 20% (Tarquinio, 2008). This speaks well for Manhattan’s ability to remain a prime office location even in the face of a severe crisis.
It is thought that the current proposed redevelopment of the 16-acre World Trade Center site will create over 10 million gross square feet of new facilities (Higgins, 2012). It is an extensive, visible and politically sensitive construction program. Estimated costs are in excess of $20 billion and comprise more than two dozen individual projects with a multi-story commercial and retail space, a major transportation hub, a memorial and museum, streets and infrastructure modifications, a performing arts center, below-grade vehicle security center, storage, parking and a central chiller plant (Gong & Keenen, 2012). The World Trade Center redevelopment program is being funded by both public and private sources and involves more than 25 federal, state, local and other interest groups and stakeholders.
Despite the recession and high unemployment since 2008, there has been sustained growth in Manhattan’s business sector, residential population and tourism industry which has completely transformed the borough (Satow, 2011). Manhattan has become a “24/7, live/work community” that continues to surpass expectations (Viteritti, 2010). Attractive and reasonably priced office space, a wide variety of housing options, a green walk-to-work lifestyle, a solid public transportation system, good schools, fine restaurants, historical sites, and great shopping has made Manhattan a place where companies want to do business, people want to live and visitors want to explore (Gregor, 2011).
Manhattan’s employment and commercial real estate sectors have performed well despite the economic slump. The destruction of the World Trade Center alone accounted for the loss of more than 50,000 jobs and millions of square feet of office space (Tarquinio, 2008). Subsequent employee reductions and relocations resulted in a 14.5% decrease in pre-9/11 employment figures and a 6% decrease in the number of companies located in Lower Manhattan (Satow, 2011). Contributing to the commercial real estate market’s recovery were major tenants with large leases ranging from Omnicom to Moody’s and Morgan Stanley to nonprofits such as UNICEF. Goldman Sachs’ decision to build its new world headquarters directly across from the World Trade Center site was another key event in the revival of the area (Gregor, 2011).
Lower Manhattan has become the attraction for businesses that cannot afford Midtown’s high rents and who desire Lower Manhattan’s value proposition — accessibility to mass transit and employee/resident amenities (Malcata-Rebelo & Pinho 2010). In addition, a steady influx of businesses has resulted in a continual increase in Lower Manhattan’s employee population, which now exceeds 345,000 workers adding to office space demands. Banking giant HSBC also pursued a lease for 300,000 square feet of space bringing hundreds of additional employees to Downtown New York (Gregor, 2011). Lower Manhattan’s economic vitality is also evident in the steady growth in mass transit ridership. Use of Downtown New York’s subway stations has increased 15% in the past five years and efficiently handles more than 50,000 commuters a day (Toy, 2012).
It is worth noting that there has been a substantial conversion of office buildings to residential use, new residential towers, a revamped retail and dining scene, an abundance of open space and parks, and a walk-to-work/school lifestyle that have all transformed Manhattan in recent years (Sederstrom, 2011). New housing units have more than doubled pre-9/11 populations (Higgins, 2012). Further, demographics have also changed considerably. Today there are more young singles and married couples with high-incomes buying condos and committing to working, staying in and raising their families in Manhattan (Viteritti, 2010). This has helped to strengthen and stabilize the city. As two-career couples work longer hours and as the city grows safer and more family friendly, there is also a big demand for large apartments with traditional layouts and amenities such as two-bedrooms, a living room, dining room, kitchen and “maid’s room” often converted into kids rooms (Higgins, 2012).
Families who want to stay are only one segment of the diverse masses demanding a piece of Manhattan. Europeans, the Chinese and East Indians are also drawn to New York (Pristin, 2009). Foreign buyers find Manhattan real estate very appealing when they compare prices in other large international cities like London. In addition, more parents are leasing apartments for their children, and some retirees are choosing Manhattan over traditional cities such as Miami (Toy, 2012).
Tourism continues to grow, and the development of new hotels in Downtown New York, including the W. And the Four Seasons, added 3,152 rooms in 2011 pushing hotel occupancy rate higher (Gregor, 2011). The robust development of Lower Manhattan’s business and residential communities also created a greater need for places to eat and shop. Thus, an influx of new retailers and restaurateurs is now present to accommodate a range of budgets and enhance the ambiance of the neighborhood. Retailers such as Tiffany & Co., Hermes, BMW, Whole Foods, and Bed, Bath and Beyond now all operate in Downtown New York, as do attractive eateries such as Cipriani, Nelson Blue and The Grill Room. There are also five farmers markets offering fresh and organic produce, meat, fish and baked goods. The redevelopment of the World Trade Center site will further provide Manhattan with the kind of first class office space and retail, cultural and open space amenities the district is known for.
Manhattan’s office market is very likely to face a range of challenges in 2012. The economy has yet to settle into a steady recovery and is being tested by challenges in the global capital markets and the global debt crisis. There is still notable job loss in the financial services community which could create a spill-over effect to other sectors. For every financial service job eliminated, a loss of two other jobs is expected to occur in various support services across the city (Gong & Keenan, 2012). If, for example, half of the spill-over jobs lost are in the office sector, total office job loss could reach 20,000 employees. At an average of 250 square feet per employee, Manhattan could see a decrease of 5.0 million square feet of absorption. The potential is very real, although it is still too soon to determine what the true impact might be.
On a more optimistic note, the financial services sector has added over 20,000 jobs in the last 6 years and has seen major companies such as Google and Facebook establish regional centers in the city (Sederstrom, 2011). The attraction for such companies is the city’s access to a large talent pool and venture capital. The city has also responded to the ongoing industry growth with its announced intention to create an engineering and applied sciences campus on Roosevelt Island (Gong & Keenan, 2012). Many are hoping that the growth of these new industries will offset the forecasted losses in the financial services sector in 2012.
There is also growth in tech companies, however, it is concentrated in the Midtown South market, not Downtown, where the financial service sector is dominant. Employees are being allocated less space for conducting their jobs in a newer trend as many organizations move from traditional office space to telecommuting (Malcata-Rebelo & Pinho, 2010). Technology enables this process and it continues to challenge the role of the office and the location in creating an effective workplace. Many companies are consolidating their workforce into smaller space depending of course on their growth projections. The overall impact on the office market is not encouraging. Many more jobs will be needed in the future to create historic levels of demand for office space.
Still, it is thought that new development will play a significant role in meeting future demand. New buildings with modern infrastructure are much better suited to creating the work environments that companies want (i.e., abundant natural light, efficient electrical and HVAC systems, etc.) (Sederstrom, 2011). There is also continuing interest in all the new development projects currently underway including the World Trade Center, Astor Place, Hudson Yards and upper Eighth Avenue. This is where true promise lies for New York and the borough of Manhattan.
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