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Manhattan Office Market Surged In Q3 Behind Big Deals On West Side

After one of the busiest summers in recent memory for commercial real estate, the New York City market looks far healthier now than it did at the end of 2016, when uncertainty and a sluggish second half sowed fears of a decline.

Rendering of Brookfield's Manhattan West project on the Far West Side of Manhattan

Brookfield and Hudson Yards were the songs of the summer for office leases, locking down major leases with BlackRock, which finally signed its 850K SF deal at 50 Hudson Yards, Amazon for 360K SF at 5 Manhattan West and Accenture for 250K SF at 1 Manhattan West.

Those deals had a major impact on the office market, which dipped to around a 10% vacancy rate, according to market reports from brokerage firms Colliers International and JLL. After a flood of office deliveries last year, not much new product has hit the market in 2017, and as a result, the market has absorbed 2.5M SF of leases, according to JLL.

While big deals at the shiny new buildings being built west of Madison Square Garden grab the headlines, the underlying economic story is driving New York offices back to desirability. 

Over the past 12 months, the city has added 89,000 new private sector jobs, a 2.4% year-over-year increase, according to Colliers. The national average for job growth was 1.7% over the same time frame. Employment in the financial sector in Q3 2017 reached a milestone, finally recovering to the level before the Great Recession hit in 2007, according to JLL.

"Total New York City employment ... has soared to an all-time high — and appears on a march higher," JLL researchers wrote in the firm's Q3 market report.

120 Broadway in Manhattan

The big leases were not confined to the Hudson Yards District, with New York-Presbyterian taking nearly half a million square feet at 237 Park Ave., the largest healthcare sector lease in Midtown on record, per Colliers. Macmillan Publishers made the biggest new lease splash Downtown, moving to 261K SF at 120 Broadway.

“Demand drives markets, and New York City employment growth is strong," Colliers Eastern Region President Joseph Harbert said. "Active leasing by TAMI, FIRE and public sector tenants all contributed to tightening availability in Manhattan this past quarter and stable pricing. Small to midsize companies that can leverage flexibility on location are well-positioned to capitalize on the market’s best value opportunities.”

Even with all that activity — nearly 10M SF in Q3 alone, Colliers reports, a 15.1% year-over-year increase — rents have not followed suit and risen. Asking rents have dropped by 1.3% year-over-year, according to Colliers. JLL's report indicates asking rents have remained flat, with any increases coming from new construction.

JLL believes the Far West Side's winning streak is far from over, and the tea leaves would agree. EY is reportedly in late-stage negotiations for 600K SF at 1 Manhattan West and Morgan Stanley, in the market for a 1.9M SF new headquarters, is eyeing Related's remaining office availability at Hudson Yards.

Despite the rent flatness, values of Manhattan office buildings have continued to grow. The average price of a Manhattan office building was $960/SF in Q3, according to Colliers, a figure that would set price-per-square-foot records in most U.S. office markets. So far this year, 38 office buildings have traded in Manhattan for a total of $12B, and 72% of those purchases were made by foreign buyers.

“Despite a slowdown in transaction activity, there is no shortage of capital from global and domestic sources seeking investment opportunities in Manhattan," Colliers Capital Markets Vice Chairman Richard Baxter said. "With destabilizing factors creating global uncertainty, anticipate additional off-shore capital will flow into Manhattan as the flight-to-safety continues. Coupled with a continued low-interest-rate environment and strong underlying economic fundamentals, capital values will remain strong as we close out 2017."