a national economic outlook & regional office market ... - Baruch College

A NATIONAL ECONOMIC OUTLOOK & REGIONAL OFFICE MARKET UPDATE FOR NEW YORK This research report was prepared for The Steven L. Newman Real Estate Institute of the Zicklin School of Business, Baruch College, CUNY by Ken McCarthy, Chief Economist, Cushman & Wakefield.

The national economy remains in slow growth mode as the uncertainty created by the seemingly endless series of budget confrontations inhibits both businesses and consumers, whose balance sheets are healthy but confidence is low. • While it is not a “grand bargain” resolving the long term fiscal challenges faced by the U.S. government, the budget agreement arrived at in mid-December sets the stage for a more stable political environment than we have seen over the past two years. • Once the immediate issues are resolved, the underlying health of the U.S. private sector is expected to assert itself leading to stronger growth in 2014 and 2015. • Although New York City has been one of the better performing metropolitan areas in the U.S. during the current recovery, growth has moderated over the past two years. SPRING 2014

The key reason for the slowdown has been weakness in the financial services sector. • Over the next several years we expect the New York City economy will at least match the U.S. economy’s performance and has good potential to exceed national growth. • This “better than average” performance will lead to rising occupancy over the next several years. However, it will be countered by an important long-term headwind as companies seek to become more efficient in their utilization of real estate. In addition, the inventory of office space in Manhattan is expected to increase for the first time in 20 years as major new projects on the West Side and at the World Trade Center are completed. • The result will be declining vacancy over time, but until there is significant growth in financial services, the vacancy rate will not decline enough to drive rents upward at the double-digit-per-year pace typical of a market spike. 1

UPDATE

U.S. ECONOMIC OUTLOOK C&W ECONOMIC The U.S. economy began to recover from the recession of 2007-2009 in the third quarter of 2009. In the seventeen UPDATE n & Wakefield Report quartersResearch since, U.S. GDP has increased by an average of 2.3% per year. This is roughly half the average growth rate of the previous four economic recoveries. Almost all measures of economic activity, from consumer spending to employment to production have grown more slowly in the current recovery than in previous upturns and continue to do so to this day.

NOMIC OUTLOOK HEALTHY FUNDAMENTALS n & Wakefield Report conomy began toResearch recover from the recession of 2007-2009 This sluggish performance has occurred in spite of a set of economic conditions that have historically led to stronger

d quartereconomic of 2009. Inexpansion: the seventeen quarters since, U.S. GDP Improving Labor have sed by an •average of 2.3% perMarkets: year. This layoffs is roughly halffallen the dramatically during the recovery as indicated by the weekly unemployment claims statistics. Historically, when the number of people filing for unemployment insurance each week falls below NOMIC OUTLOOK owth rate of the previous four economic recoveries. Almost 400,000 the number of jobs created in the economy accelerates. The number of new unemployment filings has now es of economic from consumer spending to conomy began toactivity, recover from theper recession of two 2007-2009 been below 400,000 week for years with the exception of two weeks after Hurricane Sandy, yet job growth has to production grown more quarters slowly in since, the current dntquarter ofremained 2009.have In the seventeen U.S. GDP modest. han in an previous upturns continue toisdo so to half this day. SALES over (THOUSANDS OF UNITS) ed by 2.3%and per year. This roughly •average Betterof Balance Sheets: Household debt the service ratios EXISTING have fallenHOME dramatically the past several years and are now owth rate ofatthe four economic recoveries. Almost theprevious lowest level ever recorded. U.S. corporations are recording at or near record profits and have plenty of cash on 7,400 Y FUNDAMENTALS handactivity, to expand. These trends meantothat both households and businesses are in a position to increase spending. They es of economic from consumer spending are just waiting the slowly right environment. 6,900 nt to production have grownfor more in the current h performance has occurred in spite of to a set ofsoeconomic han in previous upturns and continue do to day. • Housing revival: After seven years ofthis decline EXISTING HOME SALES (THOUSANDS OF UNITS) 6,400 that have historically led to stronger expansion: the housing sector has economic finally turned decisively 7,400 higher with sales, prices and new construction 5,900 YngFUNDAMENTALS Labor Markets: layoffs have fallen dramatically during the all rising. As the economy continues to steadiy as indicated by the weekly unemployment claims statistics. 6,900 ly improve, housing will also continue to rise, 5,400 h performance has occurred in spite offora set of economic ally, when the number ofgrowth people filing unemployment stimulating in many of the industries that 6,400 that have historically led 400,000 to stronger e each week below the economic number ofexpansion: jobs created 4,900 gofalls into homes including construction, appli- in nomy accelerates. The number of new unemployment filings has ances,layoffs furniture, all the materials during that go 5,900 ng Labor Markets: have fallen dramatically theinto a en below 400,000 per week forother two years withIn theaddition, exceptionthe of 4,400 house and many sectors. y as indicated by the weekly unemployment claims statistics. eks after Hurricane Sandy, yet job growth has remained modest. 5,400 increasing offiling homes will boost consumer ally, when the number ofvalue people for unemployment 3,900 confidence and create a wealth effect which will alance Sheets: Household debt service ratios have fallen e each week falls below 400,000 the number of jobs created in 4,900 support stronger consumer spending growth. cally over the pastThe several yearsof and now at the lowest 3,400 nomy accelerates. number neware unemployment filingslevel has 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 • corporations Pent up As their goods areof orded. U.S. arefor recording atdurable or near profits en below 400,000 perDemand: week two years with therecord exception 4,400 wearing out,toyet consumers arehas increasing pure plenty cash on hand expand. These trends mean their that eks afterof Hurricane Sandy, job growth remained modest. SOURCE: National Association of Realtors chases. This can be seen most dramatically in 3,900 useholds and businesses are in a position to increase spending. alance Sheets: Household debt service ratios have fallen the auto sector where sales are up strongly from e just waiting for the right environment. cally over the years are to now at 15 themillion lowest level 3,400 a past yearseveral ago and areand likely top units 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 revival:U.S. After seven years of decline theathousing sector has orded. corporations recording in 2013, the are strongest year or fornear autorecord sales profits since rned decisively higher with sales, prices and new construction plenty of cash on handhigher to expand. These trends mean that 2007.With confidence levels, consumers . As the economy continues improve, willdeSOURCE: National Association of Realtors useholds andwould businesses are to in asteadily position to increase spending. be expected to act on thishousing pent up to rise, stimulating growth inpurchases many of the etinue just waiting for the right environment. mand and increase ofindustries durable goods. nto homes including construction, appliances, furniture, all the U.S. MOTOR VEHICLE SALES (MILLION UNITS, ANNUAL RATE) • Strong While the overall sector economy revival: After seven sectors. years of decline the housing has has s that go into a house and many other sectors. In addition, the remained sluggish, two important sectors of the rned decisively higher with sales, prices and new construction 20.5 ng value of homes will boost consumer confidence and createtoa economy are growing rapidly andhousing are likely As the economy continues to steadily improve, will ffect which continue: will supporttechnology stronger consumer spending and of energy. Thegrowth. technoltinue to rise, stimulating growth in many the industries 18.5 ogy sector continues to evolve and grow Demand: As their durable goods are wearing out, consumers nto homes including construction, appliances, furniture, all in thenew U.S. MOTOR VEHICLE SALES (MILLION UNITS, ANNUAL RATE) areas including cloud computing, numerous easing their purchases. This can beother seen most dramatically inthe the s that go into a house and many sectors. In addition, 20.5 new retail platforms, social media and many where sales are strongly from a confidence year ago and arecreate likely ato 16.5 ngtor value of homes willupboost consumer and other products and services. To meet growing million units in 2013, the strongest year for auto sales since 2007. ffect which will support stronger consumer spending growth. demand all kindswould of technology services, gher confidence levels,for consumers be expected to act on 18.5 14.5 Demand: Asbusinesses their durable goods are wearing out, consumers in this sector are growing t up demand and increase purchases of durable goods.rapidly easing their purchases. mostsector, dramatically in the across theThis U.S.can In be theseen energy the develectors. While theare overall economy hasa remained sluggish, two to tor where sales up from year ago and are likely opment of strongly hydraulic fracturing and horizontal 16.5 12.5 nt sectors of the economy are growing rapidly and are likely tooil million units drilling in 2013, techniques the strongesthave year led for auto since 2007. to a sales revolution in e: technology andlevels, energy. The sector continues toon and natural gas technology production from shaleto reserves gher confidence consumers would be expected act 14.5 10.5 nd grow in new areas including cloud computing, numerous new and started the biggest boom in the energy up demand and increase purchases of durable goods. atforms, social media and many services. industry since theother early products decadesand of the 20thTo ectors.While the overall economy has remained sluggish, two owing demand for all Not kindssurprisingly, of technologycities services, in century. and businesses regions that 12.5 8.5 nt sectors of the economy are growing rapidly and are likely to 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 or are growing across the U.S. in In the energy haverapidly strong businesses these two sector, sectorsthe are e: technologyamong and energy. The technology sector continues to the best performing in the nation. ment of hydraulic fracturing and horizontal drilling techniques 10.5 nd grow in new areas including cloud computing, numerous new SOURCE: U.S. Bureau of Economic Analysis to a revolution in oil and natural gas production from shale tforms, social media and many other products and services. To 2 the biggest boom in the energy industry since the SPRING 2014 and started owing demand for all kinds of technology services, businesses in 8.5 cades of the 20th century. Not surprisingly, cities and regions 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 or are growing rapidly across the U.S. In the energy sector, the

A Cushman & Wakefield Research Report

US GDP GROWTH IN RECOVERIES AFTER 17 QUARTERS (AVERAGE ANNUAL GROWTH RATE FROM TROUGH) 4.50%

4.1%

4.0%

4.00% 3.50%

3.1% 3.00% 2.50%

2.3%

2.00% 1.50% 1.00% 0.50% 0.00%

Previous 4 Recoveries

2009 Recovery

2014

2015

SOURCE: U.S. Bureau of Economic Analysis, Moody’s Analytics

CAUTIOUS BUSINESSES AND CONSUMERS No one is Washington wants to go through that again. Instead, the most CAUTIOUS BUSINESSES AND CONSUMERS likely scenario is that Congresscan will continue current and wait for The persistence of slow in of the face of these healthy economic developments be traced to policy the U.S. budget The persistence of slow growthgrowth in the face these healthy economic the next election before considering whether to address long term budget debate thatcan began in mid-2011 and has continued developments be traced to the U.S. budget debate that beganup in to today. The uncertainty that the continuing political battles issues. Inhas the meantime, the deficit will declineon because of theeconomy. policies over the budget have created in the business and consumer sector been a major constraint the U.S. mid-2011 and has continued up to today. The uncertainty that the already put in place and the budget will, for a time, fade from public view. It has made businesses morehave riskcreated averse. Instead continuing political battles overmuch the budget in the businessof boosting employment in anticipation of a rising economy, and consumer have sector held has been a major constraint the U.S. businesses back, taking a waitonand seeeconomy. attitudeIt as the budget U.S. on. Outlook. In ourconfrontations view, the very fact in thatthe there willwent be littleon or and no debate has businesses much more risk averse. Instead of boosting Themade budget brinksmanship that went on for more than two years hit will a peak in October 2013 with thetopartial over finally the budget be a positive for the economy, leading higher levels employment of a Government. rising economy, businesses have held of that confrontation of confidence. As businesses households at their own situation shutdown in ofanticipation the Federal The resolution created and a new set of look budget deadlines back, taking a wait and see attitude as the budget confrontations in the instead of focusing on Washington, confidence should improve. As in December/ January/February. These deadlines are now leading to serious discussions on a budget for the current U.S. went on and on. The budget brinksmanship that went on for more confidence rises the healthy fundamental factors outlined above will begin fiscal year. An agreement appears close to achievement as of Mid-December. Once this agreement is passed, the budthan two years finally hit a peak in October 2013 with the partial to emerge leading to faster economic growth, stronger job growth and get will, for a time, fade from public view. shutdown of the Federal Government. The resolution of that generating higher incomes. As income rises, demand will begin to increase No one is Washington wants to godeadlines through that again. Instead, the to most likely scenario is thatemployment Congressgrowth will continue confrontation created a new set of budget in December/ leading stronger output growth-faster and more current policy and wait for the next election before considering whether to address long term budget issues. In the January/February. These deadlines are now leading to serious discussions income.The result will be a healthy, self-sustaining recovery which we on a budget forthe thedeficit current will fiscaldecline year. An agreement to meantime, becauseappears of theclose policies already put in place andthethe will, aThis time, expect to emerge during firstbudget few months of for 2014. will fade boost U.S. achievement as view. of Mid-December. Once this agreement is passed, the from public GDP growth from the average 2.3% per year of the past four years to 3.1% budget will, for a time, fade from public view. in 2014 and 4.1% in 2015.

Outlook. In our view, the very fact that there will be little or no debate over the budget will be a positive for the economy, leading to higher levels of confidence. As businesses and households look atwill their situation instead ofYork focusThis national environment haveown an important impact on New City ing on Washington, confidence should improve. As confidence rises the year. healthy fundamental factors outlined above in the coming will begin to emerge leading to faster economic growth, stronger job growth and generating higher incomes. As income rises, demand will begin to increase leading to stronger output growth-faster employment growth and more income. The result will be a healthy, self-sustaining recovery which we expect to emerge during the first few months of 2014. This will boost U.S. GDP growth from the average 2.3% per year of the past four years to 3.1% in 2014 and 4.1% in 2015. This national environment will have an important impact on New York City in the coming year. SPRING 2014

3


YORK ECONOMIC YORKCITY CITY ECONOMICOUTLOOK OUTLOOK K CITY NEW ECONOMIC OUTLOOK

EMPLOYMENT GROWTH: NYC VS. U.S. EMPLOYMENT GROWTH: NYC VS. U.S.

Since the U.S. recovery inYork 2009,City New York City Since the recovery began inthe2009, the New S. recovery began inU.S. 2009, thebegan New economy haseconomy has been one ofeconomy the best performing metropolitan areas in the nation. 2.5% York City has been one of the best the best performing metropolitan areas in the nation. Overall the City has seen employment by 313,000 jobs or performing metropolitan areas inincrease the nation. City has seen employment increase by 313,000 jobs Over or the same time 8.6% since reaching a bottom in November 2009. Overall the City has seen employment increase eaching aframe, bottom in November 2009. Over the same time U.S. employment has increased 5.4%. But there are two by 313,000 jobs or 8.6% since reaching a bottom mployment has increased 5.4%. But there are two important points about this stellar performance: 2.0% in November 2009. Over the same time frame, oints about this stellar performance: 1. While employmenthas in the economy as a whole grown rapidly, U.S. employment increased 5.4%. Buthas there employment in the three keyabout office-using sectors perfor(financial, important this stellar mploymentare in two the economy aspoints a whole has grown rapidly, professional & business services and information) has grown more ent in themance: three office-using (financial,in these three sectors slowly.key Since November sectors 2009, employment nal & business services and growth information) has grown 1.5% 1. isWup hile employment inrate, thebut economy asmore a whole 8.2%, a solid actually, slightly slower than the nce November employment these three sectors national average of 8.4%. Sointhe office-using sectors has2009, grown rapidly, employment in the threehave keykept pace, but arerate, not outperforming. %, a solid growth butsectors actually,(financial, slightly slower than the& office-using professional verage of2.8.4%. So the office-using sectors have kept pace, The rate of growth has slowed over the past two years. In business services and information) has grown 2011employment in New York City increased 2.4% (from December ot outperforming. more slowly. Since November 2009, employ2010 to December 2011) about 50% faster than the pace in the 1.0% U.S. ment in these threepast sectors years. is up 8.2%, solid of growth has In andathrough as aslowed whole. Inover 2012the the pace two slowed to 2.0% the first growth rate, but actually,2.4% slightly slower than 1.9%. In each loyment in New York City increased December ten months of 2013, employment in (from the City increased the average of 8.4%. So the December 2011) about 50% faster than pace in office-usthe U.S.in New York of thenational past two years the rate of the employment growth City has continued tokept outpace of the asfirst a whole, but the ingpace sectors have pace, but areU.S. not outpere. In 2012 the slowed to 2.0% andthat through the 0.5% is much in smaller than increased earlier in the recovery. forming. hs of 2013, margin employment the City 1.9%. In each TheTthe New Yorkof economy continuing expand because of st two years rate ofCity employment growthover intoNew 2. he rate growth hasis slowed theYork past growth in two major sectors: tourism and technology. But financial continued totwo outpace of the U.S. as a whole, but the years.that In 2011employment in New York services, a third, very important local industry has lagged since the much smaller than earlier in2.4% the recovery. City increased (from December 2010

2.5%

2.4%

2.4%

U.S.

U.S.

NYC

2.0%

NYC

2.0%

2.0%

1.9%

1.8%

1.9%

1.8%

1.7%

1.6%

1.7%

1.6%

1.5%

1.4%

1.4%

1.0%

0.8%

0.8%0.5%

0.0% 2010

2011

2012

2013-YTD

SOURCE: U.S. Bureau of Labor Statistics

middle of 2011. That’s critical because financial services is far more 0.0%

2010 2011 2012 2013-YTD to December 2011)toabout 50% faster than rk City economy expand because important is in continuing New York City than in the nation asofa whole. In the U.S. the pace in the U.S. as a whole. In 2012 the wo major financial sectors:services tourism and technology. employment accountsBut for financial 5.8% of all jobs, but in the SOURCE: U.S. Bureau of Labor Statistics pace slowed to 2.0%double and through thethe first ten it accounts forindustry almost that share-11.1%. hird, very City important local has lagged since months of 2013, employment themore City in011. That’s critical because financial services in is far creased 1.9%. In each of the past two years the rate of employment growth in New York City has continued to outpace New York City than in the nation as a whole. In the U.S. that of the U.S. as a whole, but the margin is much smaller than earlier in the recovery. vices employment accounts for 5.8% of all jobs, but in the The New Yorkthat Cityshare-11.1%. economy is continuing to expand because of growth in two major sectors: tourism and technology. unts for almost double But financial services, a third, very important local industry has lagged since the middle of 2011. That’s critical because financial services is far more important in New York City than in the nation as a whole. In the U.S. financial services employment accounts for 5.8% of all jobs, but in the City it accounts for almost double that share-11.1%.

4

SPRING 2014


NYC RECESSION/RECOVERY PERFORMANCE BY INDUSTRY:EMPLOYMENT CHANGE SINCE SEPTEMBER 2008

106.0

104.0

102.0

100.0

98.0

96.0

94.0

92.0

90.0 Sep-08

Dec-08

Mar-09

Jun-09

Sep-09

Dec-09

Mar-10

Financial

Jun-10

Sep-10

Dec-10

Mar-11

Jun-11

Professional Services

Sep-11

Dec-11

Mar-12

Jun-12

Sep-12

Dec-12

Mar-13

Jun-13

Sep-13

Information

SOURCE: U.S. Bureau of Labor Statistics

economy picks up, financial services employment recover,for but it is The three key office using sectors: professional and businessand services, The three key office using sectors: professional business services, information and financial serviceswill account likely to be late in 2014 before we start to see any meaningful growth. information and financial services account for approximately 32% of all approximately 32% of all the jobs in New York City. This office-using employment has recovered all the jobs lost in the jobs in New York City. This office-using employment has recovered the recession. All three sectors experienced a decline in employment during theYork recession and subsequent recovery Fortunately the New City economy has become more diversified all the jobs lost in the recession. All three sectors experienced a decline over the past two decades and in is not asthree reliantsectors on financial services as beginning in late 2009. However, starting in mid-2011 the performance of employment the began in employment during the recession and subsequent recovery beginning it was in the In 1990 financial services accounted for 14.6% to diverge, as employment in financial services began to decline while in early both1990s. the professional and business services in late 2009. However, starting in mid-2011 the performance of of total employment vs. 11.1% today. One set of industries that has and information sectors continued to increase. Mid 2011 employment in the three sectors began to diverge, as employment in saw a number of events impact the financial sector from increased its share of total employment is the Technology, Advertising, financial services began to while in both thedebt professional andthe signing of the Dodd-Frank law to the beginning of the U.S. the re-emergence ofdecline the eurozone fiscal crisis to Media and Information group known by the acronym TAMI. business services and information sectors continued to increase. Mid to this day. All of these developments have caused the finanbudget deficit/debt ceiling confrontation that continues Employment in these technology-driven, creative industries have grown 2011 saw a number of events impact the financial sector from the cial services industry to hold back on hiring until the environment clearer. twicebecomes as fast as the economy as a whole and are continuing to add jobs re-emergence of the eurozone fiscal debt crisis to the signing of the at a much faster rate. Today, employment in the TAMI sectors accounts We do anticipate that employment in thedeficit/debt financial services Dodd-Frank law to the beginning of the U.S. budget ceiling sector in New York City will pick up again in the future for for approximately 10% of total payroll employment in New York City, confrontation that continues to this day. All of these developments a number of reasons. First the debt debates in the U.S.have and eurozone are winding down reducing uncertainty. Second, making it almost as large as financial services. And it is projected to caused the financial services industry to hold on for hiring theof financial services is likely to increase. And third the regulatoas growth accelerates in the U.S. theback need alluntil kinds continue adding jobs at a faster pace over the next several years. Since environment becomes clearer. ry environment will become clearer as the rules associated with Frank law areinpromulgated. the fog lifts thethe endDodd of 2009 employment the TAMI sectorsAshas increased by the economy picks up, in financial services employment will approximately recover, but 50,000 it is likely beemployment late in 2014 before services we starthas jobs to while in financial Weand do anticipate that employment the financial services sector in not changed. New pick up again in the future for a number of reasons. to York see City any will meaningful growth. First the debt debates in the U.S. and eurozone are winding down Fortunately the Second, New York City economy become reducing uncertainty. as growth accelerateshas in the U.S. the more need diversified over the past two decades and is not as reliant on financial services as it was in the early 1990s. In 1990 financial services accounted for 14.6% of total employment for all kinds of financial services is likely to increase. And third the vs. 11.1% today. One set of industries that hasassociated increased its share of total employment is the Technology, Advertisregulatory environment will become clearer as the rules with theMedia Dodd Frank law are promulgated. the fogby liftsthe andacronym the ing, and Information groupAs known TAMI. Employment in these technology-driven, creative

industries have grown twice as fast as the economy as a whole and are continuing to add jobs at a much faster rate. Today, employment in the TAMI sectors accounts for approximately 10% of total payroll employment in New York City, making it almost as large as financial services. And it is projected to continue adding jobs at a faster pace over the next several years. Since the end of 2009 employment in the TAMI sectors has increased by approximately 50,000 jobs while employment in financial services has not changed. SPRING 2014

5


MANHATTAN INVENTORY OVER TIME

SOURCE: Cushman & Wakefield Research

MANHATTAN OFFICE MARKET.

The growth of the TAMI sectors has caused the Midtown South market to tighten and is pushing up rents rapidly. As Midtown South has gotten MANHATTAN OFFICE MARKET tighter and more expensive, firms have started to look elsewhere, CURRENT CONDITIONS particularly to the Downtown market. Downtown has enjoyed healthy CURRENT CONDITIONS The slowdown in financial services and the rise of the TAMI sectors has leasing in 2013, more than 30% above its 10-year average while leasing The slowdown in financial services and risegrowth. of theItTAMI sectors has important implications for the current market important implications for the current market andthe future in the Midtown market this year is -1.5% below the long-term average. and future growth. It means that the epicenter of the real estate market in Manhattan has shifted from Midtown to means that the epicenter of the real estate market in Manhattan has Midtown South. Most of theSouth. occupants TAMI of sectors shifted from Midtown to Midtown Most of of thethe occupants the are located in Midtown South or want to be there while OUTLOOK mostsectors of thearecompanies in the financial services are either in Midtown or Downtown. So it’s no surprise that, with TAMI located in Midtown South or want to be sector there while the of growth in TAMIin employment Midtown hasinbecome The the divergent tightest trends market in the U.S. In industries the thirdwill quarter of most the companies the financial services sectorSouth are either in key office-using also have Midtown or Downtown. So it’s surprise South that, with the7.6%, growthcompared in 2013 the vacancy rate in no Midtown was with a national average of 13.4% and an 8.7% vacancy important implications for future market conditions. Employment in the TAMI has become the tightest market in rateemployment in the nextMidtown tightestSouth market-San Francisco. office-using industries, which increased by roughly 30,000 jobs in each the U.S. In the third quarter of 2013 the vacancy rate in Midtown South the past two years is projected to slow to 10,000 jobs in 2013. Even By comparison, the Midtown vacancy rate in the third quarter of was 11.4% up from 10.5% a year earlier. In fact, the was 7.6%, compared with a national average of 13.4% and an 8.7% as the national economy picks up in 2014, office-using employment in vacancy rate in Midtown was 9.6% at the end of 2011, so the vacancy rate is up almost 2.0 percentage points in less vacancy rate in the next tightest market-San Francisco. New York will grow a moderate 20,000 jobs as the financial services

than two years. The difference between Midtown and Midtown South can also be seen in the behavior of rents. Ask-

sector recovers only slowly. We expect even stronger national growth Bying comparison, the Midtown rateofinthe the third third quarter rents in Midtown atvacancy the end quarterwas were 3.0%inabove levels Midtown South they in 2015 toyear-earlier push employment in while financialinservices up more strongly 11.4% up from 10.5% a year earlier. In fact, the vacancy rate in Midtown were up 22.8% over the same period. Net effective rents-actual adjusted for landlord concessions thattransaction year, leading rents to a jump in office-using jobs in the city by was 9.6%the at the end of 2011, so thein vacancy rate isSouth up almost 2.0the recovery began. In the second half of 2009, the average net show dramatic changes Midtown since approximately 38,000 jobs. However, just as the slower growth of the percentage points in less than two years. The difference between effective rent (NER) in Midtown South was $31.54. In the latestpast six-months rentsin are up 55.3% $49.00. stronger Over year led to those an increase the vacancy rate to in Midtown, Midtown and Midtown South can also be seen in the behavior of rents. the same period, the NER increase in Midtown was 21.5%. The growth of the TAMI sectors has caused the Midtown growth will not have the same impact as in the past. The reason is two Asking rents in Midtown at the end of the third quarter were 3.0% importantSouth markethas headwinds, rising volume of newexpensive, construction and South market to tighten and is pushing up rents rapidly. As Midtown gottenatighter and more above year-earlier levels while in Midtown South they were up 22.8% increasing efficiency in the use has of office space. healthy leasing firms have started to look elsewhere, particularly to the Downtown market. Downtown enjoyed over the same period. Net effective rents-actual transaction rents in 2013, than 30% above adjusted formore landlord concessions show its the10-year dramatic average changes inwhile leasing in the Midtown market this year is -1.5% below the long-term average. Midtown South since the recovery began. In the second half of 2009, the average net effective rent (NER) in Midtown South was $31.54. In OUTLOOK the latest six-months those rents are up 55.3% to $49.00. Over the same the NER increase in Midtown was 21.5%. Theperiod, divergent trends in key office-using industries will also have important implications for future market conditions.

Employment in the office-using industries, which increased by roughly 30,000 jobs in each of the past two years is projected to slow to 10,000 jobs in 2013. Even as the national economy picks up in 2014, office-using employment in New York will grow a moderate 20,000 jobs as the financial services sector recovers only slowly. We expect even stronger national growth in 2015 to push employment in financial services up more strongly in that year, leading to a jump in office-using jobs in the city by approximately 38,000 jobs. However, just as the slower growth of the past year led to an increase in the vacancy rate in Midtown, stronger growth will not have the same impact as in the past. The reason is two important market headwinds, a rising volume of new construction and increasing efficiency in the use of office space.

6

SPRING 2014


MARKET HEADWINDS MARKET HEADWINDS

FORECAST

New Construction and Tenant Historically, strong growth in Manhattan office market is facing a near-term challenge caused by New Construction andEfficiency. Tenant Efficiency. Historically, strong The growth in office-using employment has led to significant office-using employment hasrates led toand significant declines in vacancy rateson rents. a slowdown in the services sector, which is leading to slow declines in vacancy placed upward pressure Yet, thus farfinancial in the current recovery we have not seen and placed upward pressure on rents.Yet, thus far in the current demand for space, particularly in Midtown; a rising inventory of new the same impact from employment growth as in the past. Employment in office using industries as of September recovery we have not seen the same impact from employment growth space and increasing efficiency in the use of space by tenants. These 2013 was slightly above where it was at the peak in August 2008. Yet the Manhattan vacancy rate in the third quarter as in the past. Employment in office using industries as of September supply and demand forces have led to an increase in the vacancy rate ofwas 2013 wasabove 10.6% while in Q3 2008 7.4%. are two important trends difference: new con2013 slightly where it was at the peak itinwas August 2008.There Yet and stable rents, except in driving Midtownthis South. struction and tenant efficiency. the Manhattan vacancy rate in the third quarter of 2013 was 10.6% Over the next two years, as economic growth accelerates, the while in Q3 it was 7.4%. Thereof arethe twoManhattan important trends One of 2008 the characteristics officedriving market over the past two decades has been the lacka of inventoManhattan office market is expected to experience modest decline in this difference: new construction and tenant efficiency. ry growth. In 1990 Cushman & Wakefield estimated there were 392and million feetThe (msf) of point office in vacancy steadysquare rent growth. focal forinventory the rent growth OneManhattan of the characteristics of the Manhattan office market over the past will be Midtown South with Midtown and Downtown growing, but and at the end of 2012 the inventory was 393 msf. To be sure, new office buildings have been complettwoed decades has been the lack of inventory growth. In 1990 Cushman much more slowly. Thus, even with the expected headwinds, the over the past 22 years, but a large volume of office has also been converted to residential space offsetting the & Wakefield estimated there were 392 million square feet (msf) of Manhattan market is expected to continue to experience declining impact of new construction. However, 2013 has seen the completion of approximately 3.6 msf of office space in both office inventory in Manhattan and at the end of 2012 the inventory was vacancy and rising rents, just much more slowly than what we have Midtown and Downtown, and an additional 3.0 msf of space will come on line in the first quarter of 2014 with the 393 msf. To be sure, new office buildings have been completed over the seen in the past. One World Center. Thus, for the pastcompletion 22 years, but aoflarge volume of Trade office has also been converted tofirst time in decades, there will be a material increase in the Manhattan inventory. the of end the first quarter of 2014 there will be roughly 6.6 msf more space in Manhattan residential space offsetting theBy impact newofconstruction. However, 2013 has seen completion of approximately 3.6 msf of office space than therethewas a year earlier, the largest 12-month increase since 1990. in both Midtown and Downtown, and an additional 3.0 msf of space will Of course, more inventory tends to push up the vacancy rate until it gets absorbed by more jobs. The challenge come on line in the first quarter of 2014 with the completion of One today that jobs creating samethere volume World TradeisCenter. Thus,are for not the first time inthe decades, will beofa demand they did in the past. Cushman & Wakefield estimates that increase since 1994 number of square feet material in thethe Manhattan inventory. By the endoccupied of the first per person in Manhattan has decreased by 20%. It therefore quarter of 2014 there will be roughly 6.6 msf more space in Manhattan requires 20% more jobs to reduce the vacancy rate as fast as in the past. than there was a year earlier, the largest 12-month increase since 1990.

FORECAST

Of course, more inventory tends to push up the vacancy rate until it gets The Manhattan market is facing a near-term challenge caused by a slowdown in the financial services sector, absorbed by more jobs.office The challenge today is that jobs are not creating the which same volume of demand they did in the past. & Wakefield in Midtown; a rising inventory of new space and increasing is leading to slow demand for Cushman space, particularly estimates that since 1994use theof number square feet occupied efficiency in the spaceof by tenants. Theseper supply and demand forces have led to an increase in the vacancy person in Manhattan has decreased by 20%. It therefore requires 20% rate and stable rents, except in Midtown South. more jobs to reduce the vacancy rate as fast as in the past.

Over the next two years, as economic growth accelerates, the Manhattan office market is expected to experience a modest decline in vacancy and steady rent growth. The focal point for the rent growth will be Midtown South with Midtown and Downtown growing, but much more slowly. Thus, even with the expected headwinds, the Manhattan market is expected to continue to experience declining vacancy and rising rents, just much more slowly than what we have seen in the past.

SPRING 2014

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MANHATTAN RENT AND VACANCY FORECAST 13.0% $70.00 12.0%

11.0%

$60.00

10.0% $50.00 9.0% $40.00 8.0%

7.0%

$30.00

6.0% $20.00 5.0% $10.00 4.0%

$0.00

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Asking Rent

2011

2012

2013

2014

2015

3.0%

Vacancy Rate (Right Scale)

SOURCE: Cushman & Wakefield Research

CONCLUSIONS CONCLUSIONS

The outlook for Manhattan is positive. We forecast declining vacancy and rising rents. As is always the case in real estate, everything depends The Manhattan is fundamental in sound fundamental shape. With a vacancy rate of 10.6% at the end of the third quarThe Manhattan officeoffice marketmarket is in sound shape.With a vacancy on your location. But no matter where you are, the next few years will rate of 10.6% at the had end ofthe the third third quarter, the in third lowest ter, Manhattan lowestManhattan vacancyhad rate the nation. And average asking rents were the highest in the nation. see steady improvement driven by an accelerating national economy, a vacancy in the nation. And performed average asking as rents were the highest But therate market has not expected, or asinitthe has in the past, particularly Midtown where in the large services. corpogrowing TAMI sector andineventually, a rebound financial nation. But the market has not performed as expected, or as it has in the rate and financial services tenants are more cautious. However, this Midtown sluggishness has been countered by strong past, particularly in Midtown where the large corporate and financial services That’s why we remain fundamentally optimistic on the Manhattan office demand in the TAMI sectors which are focused on Midtown South. Downtown, which is benefitting tenants are and more activity cautious. However, this Midtown sluggishness has largely been market. from thebygrowth in Midtown South proximity countered strong demand and activity in theand TAMIfrom sectors which are to the TAMI hot spots, is also experiencing high vacancy as a result of theon rebuilding of the World which Tradeis benefitting Center. In thethelong run will benefit from the billions of dollars largely focused Midtown South. Downtown, from FORDowntown MORE INFORMATION growth in Midtown South and from proximity the TAMI hot spots, alsowell as the growth in the TAMI sector and the attractive new of infrastructure investment that hastobeen made thereis as Ken McCarthy, Chief Economist experiencing highbeing vacancybuilt as a result of the of the World Trade office space there. Butrebuilding the near term challenge will (212) be an 698excess 2502 of space. Center. In the long run Downtown will benefit from the billions of dollars of ken.mccarthy@cushwake.com infrastructure investment that has been made thereWe as well as the growth in The outlook for Manhattan is positive. forecast declining vacancy and rising rents. As is always the case in real esDonald Noland, Regional Research Director the TAMI sector and the attractive new office space being built there. But the tate, everything depends on your location. But no matter where(212) you841-7733 are, the next few years will see steady improvement near term challenge will be an excess of space. donald.noland@cushwake.com

driven by an accelerating national economy, a growing TAMI sector and eventually, a rebound in financial services. That’s why we remain fundamentally optimistic on the Manhattan office market.

The market terms and definitions in this report are based on NAIOP standards. No warranty or representation, express or implied, is made to the accuracy or completeness of the information contained herein, and same is submitted subject to errors, omissions, change of price, rental or other conditions, withdrawal without notice, and to any special listing conditions End Note: imposed by our principals.

The market terms and definitions in this report are based on NAIOP standards. No warranty or representation, express or implied, is made to the accuracy or completeness of the information contained herein, and same is submitted subject to errors, omissions, change of price, rental or other conditions, withdrawal without notice, and to any special listing conditions imposed by Cushman & Wakefield principals.

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SPRING 2014