Cushman & Wakefield recently held a recap of its 2017 Year-End Review Press Briefing during its monthly internal Speaker Series. The discussion featured Cushman & Wakefield’s top experts on the state of the CRE market, the economy and Q4 New York City office, retail and investment sales data.
Cushman & Wakefield’s thought leaders discussed the Manhattan commercial real estate market’s strong performance in 2017, and made several predictions for the year ahead. Panelists included Lou D’Avanzo, Vice Chairman, Managing Principal, Midtown Manhattan; Ken McCarthy, Principal Economist, Applied Research Lead; Richard Persichetti, Regional Director, Tri-State & Northeast; Doug Harmon, Chairman, Capital Markets; Bob Knakal, Chairman, NY Investment Sales; and Steven Soutendijk, Executive Director, Brokerage.
In regard to the New York City economy, the panelists were confident in its resiliency and the overall appeal of New York City to millennials and companies alike.
“New York is still a magnate for corporations from around the world and that will allow New York to continue to grow even if job growth slows elsewhere in the country,” said Ken McCarthy. “New York can continue to benefit from its location, the willingness and desire of companies to want to locate here.”
In 2017, New York City employment growth slowed yet still increased at a healthy pace, said Ken. Employment growth peaked in 2014, at 3.4% for New York, while it was 2.2% for the US as a whole. In 2017, the employment growth was 1.2% in New York, and 1.3% for the US.
Though job growth in 2017 was approximately half the pace of three years earlier in both the U.S. and NYC, the economy saw financial services employment rise to levels not seen in 16 years. The industry added 12,700 jobs by November 2017, reaching 490,000 employees, bringing employment back to pre-9/11 levels, primarily driven by the growth of financial technology and a healthy uptick in the hiring of traders. TAMI (technology, advertising, media, and information) employment dipped in 2017 overall, but remains the strongest driver of office growth throughout this cycle.
Manhattan Office Market Trends
One of the most notable takeaways from the briefing – leasing activity in the Manhattan office market reached its second-highest level in 17 years, increasing by 16 percent last year from 2016, with 30.5 million square-feet of new leases signed and 9 million square-feet of renewals transacted. The activity was fueled mainly by a major increase in large lease activity by corporations, with leases over 100,000 square-feet accounting for 40 percent of the year’s square-footage leased, compared to a 28 percent historical average. Cushman & Wakefield contributed considerably to this trend, with involvement in ten of the year’s 22 deals over 250,000 square-feet, including EY’s 600,000 square-foot lease at One Manhattan West.
“2017 was a year of big deals,” noted Lou D’Avanzo. “Large corporations continue to believe in New York City and are committing people and resources here long term.”
“This trend seems to be growing due to an increase in new development as large corporations sign forward commitments for future new office product,” continued Richard Persichetti.
Looking ahead in 2018, the panelists predicted that what amounts to the largest amount of new construction to hit Manhattan since the 1980s will lift asking rents this year for office space in New York, as demand continues to grow quicker than the U.S. average.
Leasing and Vacancy
Together, financial services, TAMI and the public sector were the top space takers in New York CRE in 2017. In new leases, with year-over-year comparisons to 2016: financial services experienced a 60 percent increase, leasing 5.5 million square feet; TAMI increased space by 12 percent, with 4.3 million square feet leased; and the public sector increased space by 59 percent, leasing 2.5 million square feet.
Asking rates were down in 2017 due to new development in the pipeline. Looking ahead, the new construction building boom is resulting in 13.7 million square feet of potential new development available to lease. Net effective rents for new product are rising, while declining for existing Class A properties, Rich explained.
According to Rich, vacancy for Manhattan was down year-over-year, and at 8.9 percent, real estate saw the lowest vacancy rate in the past 18 months due to robust leasing activity in Midtown and Downtown. Midtown South market had an increase in vacancy to 6.9 percent, he said, yet the area still retains one of the lowest vacancy rates within its market class in the US.
Despite an overall softening of the New York City retail market, the city experienced a stronger than expected holiday shopping season in 2017, with sales up 5.5 percent annual growth in holiday sales, according to Steven Soutendijk. Steven attributed the uptick to the highest consumer confidence levels in almost 17 years, as well as Hurricane Harvey recovery in Texas.
“For the moment, the retail apocalypse is on hold,” said Steven.
Food and beverage tenants had the highest number of retail transactions in 2017, providing the bulk of leasing with 218 deals. The number of apparel deals increased from 2016, attributable to specialty apparel users and e-users expanding to brick-and-mortar, Steven said. SoHo and the 34th Street corridor had the largest drop in asking rents in 2017 compared to 2016. Tourist-heavy Times Square ultimately had the strongest numbers – presenting three of the largest NYC deals.
Flagship leasing has slowed over the last 18 months, as the annual gross rent numbers demonstrated. In 2017, the largest deal was just over $10 million in annual gross rent, while in 2016 there were four deals above $25 million in annual gross rent. The lack of major flagship deals in 2017 has happened in stark contrast to the office market, and contributes to the overall perception of a soft retail market.
“Overall, there was a continued softening of the retail market that is clearly trying to find the new normal for rent levels, that will generate velocity and spur tenants who have been sitting on the sidelines to get back in the market,” said Steven.
Capital Markets Recap
Doug Harmon that explained that New York City remained the market leader in dollar volume for 2017, for the 16th year in the row, however the level of dominance has declined. 2016 and 2017 were the first years since 2009 where New York City dollar volume was lower than the top seven markets combined.
“It’s not terribly unusual to us, because it couldn’t keep growing at the pace that it was,” said Doug. “It needs to find its level, and it’s resetting.”
Doug noted that there was a lot of positive activity in Q4 2017 and Cushman & Wakefield has maintained a competitive market share in executing larger deals. Doug mentioned that his team’s largest deals of the year were partial interest sales, a burgeoning trend in the market as owners are reluctant to give up total control of buildings. In November, Doug’s team represented SL Green Realty Corp. in a contract to sell a 43 percent interest in 1515 Broadway to affiliates of Allianz Real Estate. And in December, his team represented Brookfield Property Partners in a contract to sell a 49 percent interest in One Liberty Plaza to The Blackstone Group.
In capital markets in 2017, downward volume trends continued as expected while property values turned red across the board in Manhattan, and 25 percent red in the Outer Boroughs, Bob Knakal, Chairman, New York Investment Sales, explained. This was the third consecutive year with volume drops.
“History would indicate these two trends should continue for another year or two. Tax reform could reverse this,” he said.
The average price per square foot increased by seven percent in the Outer Boroughs, and decreased by four percent in Manhattan.