New Development, Emerging Submarkets Shift Manhattan’s Office Landscape
Bolstered by New York City’s growing and diversified economy, Manhattan’s office market continued to hum along during the second quarter, if at a slower pace than earlier in 2018.
Technology, advertising, media and information (TAMI) companies are looking at in-demand submarkets such as Chelsea and Midtown South, where the bulk of new development is underway. Some financial firms are contemplating a move to the Hudson Yards neighborhood, where more than 9 million square feet of space is scheduled for completion in the next several quarters.The wave of efficiently operated properties is a magnet for the demands of forward-looking tenants and the city’s growing millennial workforce.
Vacancy rates were below 11 percent across all submarkets in the second quarter, and new product scheduled to come on line during the next several quarters will help accommodate demand from creative industries and other sectors of the local economy. The supply-constrained United Nations-Turtle Bay submarket posted the borough’s lowest vacancy rate, 4.4 percent, while the famed Plaza District posted a 10.2 vacancy rate—a sign of Manhattan’s changing office landscape. Asking rents gained 40 basis points year-over-year overall to $64.86-per-square-foot.
On the development front, the highlight of the second quarter was the debut of 3 World Trade Center. Completed at a reported cost exceeding $3 billion, Silverstein Properties’ 2.5 million-square-foot building is the fourth trophy tower to open at the site since the terrorist attacks of Sept. 11, 2001.
Among the most technologically advanced office buildings in North America, 3 World Trade Center’s structural system features a reinforced concrete core encased in steel. GroupM, the advertising giant and the property’s anchor tenant, occupies some 690,000 square feet on six floors.
All told, some 4.6 million square feet of office space is scheduled for completion by the end of the year, led by 55 Hudson Yards, Mitsui Fudosan America’s 1.4 million-square-foot tower at 555 W. 34th St. in the Chelsea submarket. Another noteworthy addition on the way is Clarion Partners’ 390 Madison Ave. An unusual and technically challenging reinvention of a 65-year-old property formerly known as 380 Madison Ave., the project will add almost 862,000 square feet of Class A office space to the Plaza District.
After $4.5 billion in sales during the first quarter, transaction volume slipped 37 percent to $2.8 billion during the second quarter, a 25 percent year-over-year decline. Much of the disparity between quarters can be traced to a single deal, Google’s $2.4 billion acquisition of Chelsea Market from Jamestown, which closed in March. That transaction set a new record of $2,181 per square foot. The average price per square foot dropped 16 percent year-over-year and 32 percent from the first quarter.
Despite the dip, Manhattan office assets continue to command big price tags. The top 5 office sales accounted for more than 80 percent of the borough’s total volume during the second quarter. In May, Savanna completed the largest second-quarter transaction, the $640 million acquisition of 5 Bryant Park from Blackstone. That works out to $939 per square foot for a 681,790-square-foot, 60-year-old asset that was last renovated in 2015.
The sale was subject to a $463 million loan held by Deutsche Bank. In another notable Midtown Manhattan deal, SL Green Realty and Ivanhoe Cambridge sold the 674,000-square-foot leasehold office condominium at 1745 Broadway to Invesco Real Estate for $633 million. That transaction was financed by a $345 million loan provided by Wells Fargo.
Rounding out the top five buyers in Manhattan were STRS Ohio, SL Green and Commerz Real, the real estate investment management affiliate of Commerzbank, the German financial services company. The only foreign investor to close a major Manhattan office deal during the second quarter, Commerz Real paid $332.5 million for 222 E. 41st St., a 391,000-square-foot Class A office tower in the Murray Hill submarket.