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NYC's New Tech Giants Are Growing Fast, But Their Impact Will Hit Slowly

Amazon and Google's New York City campuses, each announced in the last three months, are the biggest stories to hit New York City commercial real estate since the construction of Hudson Yards and the rebuilding of the World Trade Center. Unlike the near-immediate impact of those developments, the rapid growth these tech giants have planned will impact the city slowly.

The view of Midtown from Brookfield's One Manhattan West

The ultra-hyped Long Island City HQ2 and Google’s plans for a sprawling new campus in Manhattan’s Hudson Square area confirmed for many people the city is now seriously challenging the Bay Area as the country’s premier technology hub. Many landlords — particularly those in Long Island City — are expecting their office space will be more in demand than ever before, both from the tech companies themselves and the scores of other firms wanting to be close to the action.

But anyone hoping for lightning impact will be sorely disappointed.

Big tech firms’ growth in the city is indicative of a greater, seismic shift in the demographics of the city and its workers, experts said but not something that will be felt in leasing velocity or rental figures anytime soon.

“It’s definitely not an overnight thing,” said Danny Ismail, an analyst at real estate research and advisory firm Green Street Advisors. “It doesn’t immediately cause movements. It is good for the more localized markets, you see that move a lot faster. But for New York City overall, it takes a lot more to move that market, and it takes a lot more time.”

Amazon's HQ2 site in Long Island City was in an opportunity zone.

In Long Island City, Amazon plans to build 4M SF on the waterfront in the next decade and possibly 4M SF more in the following years. The company is leasing Savanna’s One Court Square, which has 1M SF free with the departure of Citigroup. Amazon’s entry into Long Island City will be staggered, reportedly starting with 700 employees this year and expanding to 25,000 by 2028. Work on the new site, which has not yet received all its approvals, may not start for at least another two years.

“It’s definitely going to help,” Marcus & Millichap Associate Broker Eric Anton said. "There will be new projects and office conversions … It will be slow."

Anton said many will be looking to capture the interest of other tech firms and lure them away from their current haunts in NoMad, Flatiron, Meatpacking and Hudson Yards.

“I’ve spoken to three or four of the major owners, and [leasing velocity] has been slow, [but] there’s no question this announcement will generate interest from other companies to consider Long Island City,” he said.

The area’s office vacancy is at more than 20%, according to a report Marcus & Millichap compiled following the Amazon decision. There is no denying that tech companies like to huddle together, and looking at Amazon's growth in Seattle could provide something of a crystal ball.

Vulcan Real Estate Investment Strategy Director Lori Mason Curran, whose firm has developed around 3M SF for Amazon in Seattle, said before Amazon planted its headquarters at South Lake Union development, there were largely just professional services and life science companies in the area.

Facebook and Google followed Amazon, and the big company presence drove the leasing velocity coming from startups and service retailers like hairdressers, physical therapists and dentists, Mason Curran said. Still, Amazon itself has been growing its real estate presence only incrementally in recent years.

“There was a big jump with growth and expansion. But after 2012, it’s been 15-to-20% a year in terms of square footage, which is very robust, but it is also quite regular,” she said.

Amazon pushed many developers to build office space speculatively, she said, much of which was absorbed between 2015 and 2018.

Amazon buildings in Seattle, which the company refers to as 'Bigfoot' and 'Nessie'

Of course, New York has long been a tech hub, well before the spate of announcements last year. While financial services companies remain the city's chief employers, technology companies have been beefing up considerably — with more than 76,000 tech jobs added here in the last 12 years.

Over the last two years, the sector has seen a 12% increase in local job growth, according to CBRE, with tech tenants taking more than 1.6M SF in Manhattan in the first three quarters of 2018 alone.

“New York’s office market was previously highly cyclical because it was dependent on financial services — which itself is cyclical,” RXR Realty Executive Vice President Seth Pinsky said. “Presumably the tech companies will be less cyclical, or their cycles will be less closely correlated with those of financial services … This will help New York address one the real challenges it faced in the '80s and '90s: dramatic swings from boom to bust.”

Pinsky will be a speaker at Bisnow's Amazon HQ2 event in New York next month.

Something like HQ2 or Google Hudson Square really does play a role in shaping the diversity of tech talent, which could play out in the commercial real estate world for decades to come.

"I think that one of the reasons that Silicon Valley is so successful is that they have these tiers of talent, these engineers that hack in their garage all the way to executives,” said Jeannette Wing, a former Microsoft Research corporate vice president.

Wing, now the Avanessians Director of the Data Sciences Institute at Columbia University, said Columbia’s Masters of Data Science program saw a 40% increase in the number of applicants last year. Wing expects startups working with artificial intelligence to grow significantly in the coming years in New York City, and Columbia's admissions reflect that talent is coming in to meet the demand.

Applicants for Columbia's Masters of Data Science jumped 40% last year

“You start grooming middle management talent … When there is more of that talent, you will also see the startup community start to mature and become small to medium companies,” she said.

New York already has the jump on the Bay Area, because tech growth will interweave with established industries like law, finance, healthcare and media for which New York is the national center of gravity.

“It’s a virtuous cycle," Wing said. "You start as a startup, now you have some mature middle management that will take it to the next level. Then other startups get inspired. You continue to see that startup/tech fever.”

Landlords remain circumspect, though many are working to shape and develop their portfolio to prepare for tech talent demand in the coming decades.

“We’re fortunate that the decision was made to come to our three markets,” Columbia Property Trust President Nelson Mills said. "We are not rushing out to buy properties there for that reason, but it’s welcome news."

CXP's assets are focused in New York, San Francisco and D.C. 

Around half of the REITs office holdings in New York City are filled with technology, advertising and media companies, including long-term leases with Snap and Twitter in its buildings.

“New York is so large of a market that it is really hard for any individual user to change the market substantially,” CXP Senior Vice President David Cheikin said. “[But] this is just another example of the evolution of human resources being more critical than real estate."