The office market in 2017 has rebounded from the slowdown of 2016 — suggesting that Manhattan market conditions remain stronger than some might have imagined at the end of last year. Growth in office-using employment has picked up steam this year, and New York’s Gross City Product expanded at a faster rate than in 2016. Buoyed by large transactions in the financial services and government sectors, leasing activity also expanded in the first half of 2017, outpacing 2016’s mid-year leasing activity by 19 percent. Asking rents continued their trajectory of modest growth, though tenant improvement allowances have grown at a far faster rate, suggesting tenants are paying lower net effective rent; meanwhile, the number of upward repricings on existing listings fell off considerably in the first half of 2017, while
Nicole LaRusso, CBRE
downward repricings continue unabated from last year. Despite the increase in both leasing activity and velocity in the first half of 2017, Manhattan continues to see negative net absorption this year, largely due to the delivery of new office product in Midtown South and Downtown. This has pushed up the availability rate to 12.0 percent — suggesting increasingly tenant-favorable conditions in the market.
New York City Employment
After a relatively slow 2016, employment growth has picked up steam again in 2017. New York City office-using employment reached nearly 1.66 million, having grown by 43,800 jobs in the first half of 2017, up 2.7 percent from year-end 2016. This mid-year growth rate far outpaces that seen throughout 2016, when the city added only 10,200 office-using jobs, a scant 0.6 percent annual growth.
Much of the growth has been driven by the expansion of the FIRE sector (finance, insurance and real estate), which added nearly 16,200 jobs in the first half of 2017, up 3.5 percent from the end of 2016. Last year, FIRE employment in New York City declined by nearly 1 percent, or 4,200 jobs.
Legal services employment has also seen significant growth in the first half of 2017, adding 4,700 jobs, a 6.1 percent increase since 2016. This shows a reversal from last year, when this sector lost 1,700 jobs, a decline of 2.2 percent.
Employment among the TAMI sectors — tech, advertising, media and information — has also picked up again, posting an increase of 2,200 jobs in 2017, a 0.6 percent bump. The employment growth rate in 2016 had been sluggish, at just 0.2 percent. Despite this modest rebound, TAMI employment growth is well below the pace seen earlier in the economic recovery, when TAMI posted an average of 4.2 percent annual employment growth (between 2009 and 2015).
Manhattan Leasing Activity
Much like employment growth, Manhattan’s first half 2017 leasing activity — including all relocations and expansions but excluding renewals — is also outpacing that of 2016.
By the close of the second quarter, leasing activity totaled 13.67 million square feet, which is 2.22 million square feet (19.4 percent) ahead of where things stood at the same time last year. Additionally, leasing activity in 2017 is outpacing the city’s five-year first-half average by 6.3 percent.
Renewal activity totaled 4.15 million square feet for the first half of 2017, down from 4.54 million in the first half of 2016, a decline of just under 8.6 percent. However, total first-half 2017 leasing velocity (which combines relocation, expansion and renewal activity) is ahead of first-half 2016 by 1.83 million square feet, or 11.4 percent, driven by new leases.
Leasing Activity by Size
The strong first-half 2017 leasing activity is driven largely by an abundance of very large transactions, with nearly 2.28 million square feet signed by tenants greater than 250,000 square feet. These include BlackRock, 1199 National Benefit and Pension Funds, and Spotify. In fact, there were five transactions above 250,000 in the first half of 2017. In first-half 2016 there were only two.
The first half of 2017 also saw a larger-than-normal volume in the 50,000- to 99,999-square-foot category, with 2.02 million square feet of leasing activity — the most year-to-date activity in this size range in the last five years.
While the volume of leasing activity among large blocks of space is pacing well ahead that seen in previous years, the volume among smaller blocks has fallen behind. There has been a dearth of new leases in the 25,000- to 50,000-square-foot category in 2017; at 1.80 million square feet in the first half, the volume in this size range is at its lowest level since 2012, and about 28 percent below its five-year first-half average.
Leasing Activity by Industry
Looking at leasing activity by industry, a few notable trends emerge. First, while finance and insurance tenants almost always account for the largest share of annual leasing, 2017 has seen this sector pull far ahead of the pack. Financial services tenants accounted for 30.2 percent of all leasing activity, well ahead of the 24.1 percent average of the past five years. Companies in this industry completing large lease transactions include Blackrock, JPMorgan Chase Digital and Aon, each of which signed leases for more than 200,000 square feet. It’s also notable the JPMorgan Chase and Aon transactions involved these firms’ digital business arms.
Another notable trend is the surge in government leasing activity, which accounted for 7.9 percent of the first-half 2017 total, though its five-year average is just 1.0 percent of leasing activity. Most of the government leases were Downtown, including two large relocations: the 342,000-square-foot New York State Attorney General deal at 28 Liberty Street and the 194,000-square-foot New York City Human Resources Administration lease at 375 Pearl Street.
Meanwhile, technology, marketing/public relations and media & entertainment tenants — a group roughly corresponding to the TAMI sector — have been less active in signing new leases in the first half of 2017 than in recent years. Despite tech tenant Spotify’s two leases totaling 481,000 square feet at 4 WTC, which are among the largest transactions of the year, the TAMI segment accounted for just 27.2 percent of leasing activity in the first half of 2017; over the past five years, this sector’s share has averaged 31.5 percent.
The first half of 2017 saw a great deal of leasing activity among tenants that fell outside of the main industry categories. Among the largest of these “other” tenants was the 578,000-square-foot lease by 1199 National Benefit and Pension Funds, and a flurry of transactions from notable cosmetics and beauty companies, including Avon Cosmetics’ lease for 91,000 square feet at 1 Liberty Plaza, MAC Cosmetics’ lease for 86,500 square feet at 233 Spring Street, Harry’s Razor Company for 61,600 square feet at 1 Hudson Square and Glossier’s 26,000-square-foot lease at 161 Avenue of the Americas.
— By Nicole LaRusso, director of research and analysis, New York and Tri-State Region, CBRE. This article first appeared in the September 2017 issue of Northeast Real Estate Business magazine.