With the latest office markets reports showing that low unemployment and relentless growth in the TAMI sector have led to the high leasing volume in Manhattan since 2001, experts from CBRE are predicting the market will hold steady in the coming year. And they don’t think a recession or any other factor is going to change current trends drastically, either.
At a panel held at 200 Park Avenue by CBRE, “2020: The Year Ahead,” moderator Spencer Levy, chair of Americas research and senior economic advisor at the firm, discussed growing landlord and tenant confidence, along with speakers Nicole LaRusso, director, research and analysis; Darcy Stacom, chair and head of NYC capital markets; and Mary Ann Tighe, CEO of NYC region.
“Landlords are flexing their muscles,” said LaRusso. “There’s a flight to quality new assets, which we define as after 2000, as well as those with substantial renovations. An environment that helps retain workers and improve worker productivity.”
She added, “If Frank Sinatra Sinatra were here, he would say 2019 was a very good year.”
A 2019 year-in-review report by CBRE showed that asking rents had climbed to an all-time high, $80.43 psf over 2018’s $73.36. Once concessions were factored in, net effective rents in the borough averaged $52 psf. The largest leasers were tech titans like Facebook and Google as well as WeWork, which showed that the market was driven largely by companies looking for new as well as revitalized office space. Another factor was an increase in office-using employment. Along with very large (100,000 s/f and up) spaces, medium (25,000-100,000 s/f) also did well while demand for smaller spaces cooled. LaRusso attributed to this to a continued demand for flex space, while in the past those smaller spaces would have been leased directly. There was also a slowdown in leasing by flex space operators (18 percent to 12 percent year-over-year), but this was even before WeWork’s disastrous IPO pullout and restructuring efforts. Midtown was the leader in highest asking rents and overall, landlords were more confident asking for higher rents.
As for what the industry should expect in 2020, Levy said politics will be a factor but more so on a local level than a national or global one, even with impeachment hearings and this being an election year.
“Our forecast has no R-word in it,” said Levy. Instead, he’s predicting continued low interest rates, low inflation and an environment where foreign investors create jobs and diversity. High returns the city offers are one reason for the foreign interest. Another is the local talent pool. While on a percentage basis, New York isn’t growing jobs as quickly as Boston or San Francisco, number wise the city that never sleeps leads.
“What is the most important amenity in New York?” asked Levy. “New York. It’s created the most jobs in America in the last 10 years.
Then there’s the live-work-play factor and the transportation systems.
The aforementioned selling points, he believes, would override a business’s perfectly legitimate concern that New York is not an easy city to do business in, ranking 62nd in a recent study by Arizona State University.
Ironically, it may even be the difficulty of doing business here that has contributed to the overall health of the office market, Tighe commented.
“It’s really hard to do anything in New York,” she said. “As a consequence, we are never really oversupplied in New York.”
It helps that at this time businesses based outside the city appear to be confident about expanding here, signing on for larger footprints than they had in the past for first-time ventures in New York. Tighe gave Facebook, who committed to 1.5 million s/f of space at Hudson Yards, as an example.
“It used to be when I met people not in New York and they’d say I want 40,000 s/f, I’d say, ‘Why don’t you stick with an office suite?’ That’s not the case, anymore. The scale (of properties) allows companies to do significant hiring.”
Stacom, meanwhile echoed Levy’s sentiment about foreign investment being ahead, saying she’s already seeing landlords of larger scale projects doing this quietly.
“Most landlords don’t want you to know who their capital partners are,” she said.
Specifically, Stacom predicted more investment in Manhattan’s office market by Germans lured by the promise of better cap rates, as well as Australian investors, as there simply aren’t enough opportunities to go around at home. She’s also starting to see that companies that have left the city are returning.
“One of the things I would tell people is New York corrects itself really quickly. Within 12 months you see signs of people reentering the market. In other parts of the country, they go down and stay down for six years.”
LaRusso said predicts slow growth with rents inching up. Additionally, as the last of buildable sites gets used up in Manhattan, there will be more emphasis on renovating existing buildings, adding floors and terraces.
“The large users look for the best product on the market,” she said.