NYC Sees Rising Office Rents, Development Activity Picks Up Across Boroughs
In New York City, sizable tenants are renewing their office leases and expanding work space. Citywide, office space searches are being driven by new businesses that need to establish presence. These dynamics have the office market operating as powerfully and effectively as possible. New York City organizations are slated to create 80,000 new jobs this year, expanding total employment by 1.9 percent.
Major companies like Google, Facebook and Amazon have recently committed to large blocks of space, which are becoming notably rare as office vacancy levels in the Big Apple continue to tighten. Vacancy will slip 10 basis points to 9.6 percent this year as firms absorb more than 3.8 million square feet. As a result of office vacancies continuing to tighten, builders have started to add to the pipeline, which New York City will see come to fruition this year with the opening of 10 Hudson Yards, Related Cos.’ long-awaited office building project in Manhattan’s West Side. Overall, developers will complete 3.6 million square feet of office space this year, with nearly half at 10 Hudson Yards. Located near Hell’s Kitchen, Chelsea and the Penn Station area, the building is part of the Hudson Yards urban renewal project.
Manhattan remains the leading choice among developers, but Brooklyn, the most populous of New York City’s five boroughs, is swiftly progressing as creative spaces experience high demand and sizable firms become more comfortable establishing a presence across the East River. Office activity in Queens is also picking up as builder interest in that borough accelerates. With the overall increase in construction, pre-leasing activity is elevating in lockstep, particularly in the Manhattan submarkets that account for the vast majority of metro’s office market. In the big picture, demand will surpass modest supply growth, contributing to a seventh straight year climb in asking rent. Strong demand for existing space in New York City will continue to grow, stimulating a 5.1 percent rise in asking rents to an average of $62 per square foot.
In the midst of rising prices, investors have been intent on well-located assets with desirable tenants, particularly in Midtown and Lower Manhattan. The consistency of appreciation and rental growth, combined with a diverse pool of buyers, makes New York City the first investment choice for many sources of foreign capital and institutional buyers who command the top end of the market. Foreign capital investors will seek security in the market, supporting values at the high end. Industrial properties with conversion potential will continue to see increased attention from private parties. Meanwhile, local private investors have been changing outdated industrial spaces into offices in the outer boroughs, while focusing on smaller options when looking to Manhattan. An enduring market strength will encourage many buyers to stay active, while investors who have held over the long term may take advantage of a seller’s market in order to diversify their portfolios. Brooklyn will see an increase in activity as confidence in the office market continues to rise.
— By Nat Rockett, Associate Vice President Investments, Marcus & Millichap. This article first appeared in the March/April issue of Northeast Real Estate Business magazine.