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The Next New York Giants Are Amazon, Facebook And Google

J.P. Morgan Chase, Goldman Sachs, Morgan Stanley — these are the names that have dominated Manhattan's office market for decades. Media titans like Time Warner and Condé Nast have also shaped where the city chooses to work. But the most powerful figures in the country's biggest office market may soon be names associated with the West Coast: Google, Amazon and Facebook.

31-41 Union Square West, mixed-use buildings in Midtown South, Manhattan
31-41 Union Square West, mixed-use buildings in Midtown South, Manhattan

A new study from Newmark Knight Frank shows technology has become a more dominant piece of the office leasing market each year, and its trajectory is still going up. Over the past three years, Google, Amazon and Facebook have averaged nearly 500K SF of office leases combined. Technology, advertising, media and information companies make up 30% of Manhattan's leasing activity, up from 19% 10 years ago. 

While many cities count on luring outside companies to open satellite offices to spur office growth, the tech giants already in New York City are driving most of the growth, and they are expected to get even bigger.

"It’s these tech companies that are already here that seem to be the next financial, legal-type size tenancies," Newmark Knight Frank Senior Managing Director of Research Jonathan Mazur said. "When you look for demand, where is that coming from? You look from either expanding tenants already here or ones that start out on the West Coast and want a New York office."

The market that has most acutely felt this insatiable demand for space is Midtown South. It has the lowest office vacancy of any submarket in the country, according to NKF, and landlords have been able to increase rents to over $100/SF. The average rent bump for the landlord of a Midtown South office building — like the boutique, narrow buildings that line Union Square, Chelsea and Park Avenue South — has been 54% in the last five years.

While data by its nature looks at the past, the future is also bright, Mazur said. Facebook is in the market for more space around its 265K SF lease at 225 Park Ave. South, and there are companies that do not carry the name recognition of New York's big three tech tenants also growing into exponentially larger spaces.

"We hear about these tenants all the time who go from 5K SF to 50K SF," said Mazur, who was recently promoted to head NKF's national research. "[NKF was] on the agency side of a deal that went from 28K to 80K. I heard about it yesterday morning. It’s happening more than you think."

The office absorption numbers bear out in the corresponding job growth statistics. The technology sector alone has added 76,000 jobs in the city since 2006, a growth rate of 30%, far outpacing the city's broader job growth rate of 18%. 

Newmark Knight Frank Senior Managing Director of Research Jonathan Mazur
Newmark Knight Frank Senior Managing Director of Research Jonathan Mazur

The growth of tech in New York goes far beyond Google, Amazon and Facebook. Increasingly, major corporations are opening satellite offices for their tech divisions — think J.P. Morgan's deal at 5 Manhattan West, in the same building where Amazon is bringing 2,000 jobs or Capital One's 75K SF lease, then expansion to 130K SF, at 11 West 19th St. — and many of those offices act like tech companies, both in location desire (Midtown South) and growth (exponential).

Capital One has expanded its tech division, and while Mastercard has 75K SF at 114 Fifth Ave., NKF's report indicates the division is looking to relocate and balloon to 225K SF. 

"These digital offshoots are taking a lot of space and not necessarily near the headquarters," Mazur said. "They’re doing something completely different than what’s happening at headquarters."

Because Midtown South is nearly full and new office buildings are hard to come by, when these tech companies reach a certain stage of growth, they are forced to leave the neighborhood. This has resulted in boons for Downtown, which lured Spotify's massive expansion from Chelsea to 4 World Trade Center, and the Far West Side and the affordable area around Penn Station. If a company wants a 40K SF floor plate, it has to look far away from Union Square.

Mazur also sees future growth with household names that are not yet big presences in New York. Netflix occupies only around 15K SF in Manhattan, for instance, but Mazur said, "How many people do you know who use Netflix, everyone?"

"I look at these companies that are fully in our day-to-day lives and have larger occupancies in other markets," he said. "I think Uber's in the market for space, and I can see them expanding. How about Paypal? I expect companies like these to increase their market share in New York."

While the data about tech's growth and trajectory shows clear upward growth, a big variable in the data is WeWork, Mazur said. The co-working giant is the third-largest occupier of leased space in the city; it has locations in 17 of Manhattan's 19 submarkets as well as outposts in Brooklyn and Queens. It fills about 4M SF of offices in New York City as of mid-2017, NKF said, having done deals with 31 different landlords.

WeWork keeps its data carefully monitored, making it difficult to ascertain its place in the market and leaving fundamental questions about how to evaluate it unanswered, Mazur said. WeWork signs its leases directly with landlords, but if its spaces were to count WeWork as a landlord, rather than a tenant, it would be the 35th-biggest landlord in the city. 

Even beyond raw numbers, WeWork's impact is clouded. While it has focused on enterprise tenants, signing big companies to big leases, there is little doubt that the small companies that fill desks at WeWork locations can grow and graduate to their own office space. There is just no way to truly tell how many do that.

"They’re everywhere," Mazur said of WeWork. "They’re pretty guarded with their statistics and information ... We keep good track of what they do. They’re about 1.5% of the overall market. We count their leases, but don't count leases within their tenancy. In the end, WeWork’s on the lease."

WeWork operates much like a Silicon Valley company, so discovering what it, Google, Facebook or Amazon will do next is rarely more than a guessing game. But considering the pace at which these giants are taking up office space in Manhattan, it is fair to wonder if they will provide the solution to New York City's upcoming office supply bonanza.

CORRECTION, OCT. 20, 3:50 P.M. ET: Facebook's lease at 225 Park Ave. South is for 265K SF, not 190K SF, as a previous version of this story stated. This story has been updated.