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Weekly Market Report - August 15, 2019

Office Leasing in Manhattan

· Midtown leasing continued slowing down in June, totaling just under $1 million SF, which is down 21% from the month before and 26% year-over-year. Availability rate stayed at 10.6% with the average rent rising to $88.20

· Midtown South in June totaled 610K SF, a 20% decline since May. Availability rate went down to 10%, and the average asking rent went down to $83.12

· Lower Manhattan increased to 890K SF in June, doubling since the month before, making it the strongest half-year since 2000. The availability rate fell to 13% and the average asking rent increased to $63.13

In the first half of this year, the net job creation averaged 172K per month, which kept the national vacancy rate steady at 9.7% thanks to new office assets. According to sources, the office market will continue to perform well through the rest of the year. Annual asking rental rates “in the second quarter grew 4.2%, the fastest rate this cycle and above the five-year average of 3.4%”. The average asking rental rate was $26.83/SF. Net absorption more than doubled to 24 million SF in the second quarter, even though sublet space added 1.9 million SF back into available inventory. Office construction was at its highest level growing 9.6% in the past 12 months with 21.7 million SF added and 163.6 million SF is currently in the pipeline nationally.

The New York metro area is starting to recover from a cycle that lasted almost a decade. While retail has been a great staple in NYC, brick-and-mortar stores must keep up with the fast pace and change as the demographics and technology evolve. Online vendors, including Amazon, rose 1.7%, and they now account for 12.45% of the national retail spend. For office developments, there has been little growth in the city; in general, demand for office space is dwindling. Instead of coming into the office, people are working at home or “hoteling” it. When a lease comes up for renewal, tenants find themselves looking for a space that is just half of what they currently have. WeWork is the fastest-growing office tenant, however, tenants are leaving Times Square and moving to places like Hudson Yards and New Jersey.

Recently, Singapore’s GLP just sold one of their massive warehouse’s portfolios to New York City’s Blackstone Group for $18.7 billion, which is now one of the largest deals ever in industrial real estate. This portfolio includes 1,300 properties spanning over nine states with 179 million SF, which doubled their U.S industrial holdings. This deal has also given Blackstone the top spot in the e-commerce property game in the U.S. A source close to GLP says that the firm is still looking to expand in North America, but they couldn’t pass up this good of a deal when the cost of this portfolio was only $8.1 billion in 2015.Blackstone’s purchase shows that the e-commerce world is continually increasing, and people would rather shop online than in stores.

While some say warehouse space will become more valuable, some commercial real estate brokers are already seeing clients moving away from these types of space due to the small list of tenants who are willing to pay the price. Industrial space across the country had a 7% availability rate and a 4.3% vacancy rate at the end of 2019’s first quarter. This was the lowest availability rate and lowest vacancy rate since 2000 and 2002, respectively. The U.S. saw just 33.2 million SF of new industrial supply in the first quarter, which was a 20% drop over the year. Industrial space asking rents throughout the country have been increasing since 2011 with the average being $6.31/SF.

After ordering something offline, people expect their package to be there in just a few short hours, which means that warehouses need to be close to residential areas. Drone’s have been giving people hope, but it has yet to hit the U.S. Blackstone plans to “capitalize on the growing number of retailers moving their supply chains closer to customers in urban markets”. With this, they believe that e-commerce will continue to rise, and the demand for e-commerce warehouse space will remain strong from coast to coast. In the five boroughs, they saw 2.5 million SF of industrial space leased last year with 95% of the deals being for e-commerce and logistics tenants. Newly built and renovated warehouses in the city can ask for rents up towards $30/SF.

New York City’s lending fields aren’t just for banks, debt funds, mortgage trusts, and life insurers anymore. Some of the city’s biggest owners have now launched debt arms, which are “compensating for a conspicuous lack of appealing opportunities in the realm of pure equity plays”. However, not all of these owners are new to the game: Brookfield Asset Management is focusing on subordinate debt since the early 2000’s; SL Green started in 2002. But, in the recent years, they have reached new heights in size and significance. Their success has brought out other owners out of the shadows and into the open water. Silverstein Capital Partners came late last year and got a $250 million mezzanine loan on JDS Development’s 9 Dekalb Avenue, which is going to become Brooklyn’s newest tallest building. International landlords have even entered the game and grown interest in for mezzanine debt. Samsung took on $100 million mezzanine at 485 Lexington Avenue. Some skeptics have said that this new interest in mezzanine will make it too easy for developers-cum-lenders, but other says that these people “value these junior lenders serious property-management smarts”.


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