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Weekly Market Report - November 10, 2022

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Office Leasing in Manhattan Drops 40 Percent From September to October


Manhattan saw 1.59 million square feet of office leased last month, a 40 percent drop from September and the lowest monthly total since May 2021. The borough’s availability rate also increased 0.4 percentage points month-to-month to 16.8 percent, the biggest increase since December 2021, as several high-profile companies cut back on their office space. Despite the grim October, this year has looked a bit better than last for Manhattan leasing. So far, the borough’s had 25.77 million square feet of leasing activity, an increase from the 19.03 million during the same time last year. Midtown, Midtown South and Downtown all felt the absence of those big deals. Midtown saw 580,000 square feet of leases signed in October, an almost 50 percent decline since September and a 61 percent drop from October 2021. Downtown had 240,000 square feet of space signed in October, a 25 percent drop from September and 44.2 decrease compared to 2021.


Midtown South’s 770,000 square feet was nearly a third down from September to October, though the neighborhood almost matched the 780,000 square feet of deals it saw last October. Midtown South was home to Manhattan’s three biggest transactions: software company Medidata Solutions177,000-square-foot renewal at 350 Hudson; The Fedcap Group’s 85,000-square-foot lease, and internet marketer Rokt’s 33,860-square-foot expansion at 175 Varick Street. And larger deals are likely coming in November and December, which tend to see stronger leasing as companies rush to get their offices squared away before the new year.


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Top Office Developers Hit the Pause Button on New Projects


Some property developers view periods of economic uncertainty and weak office demand as good times to launch new projects. Because large-scale developments tend to take three to five years or longer, developers bet that tenants looking to trade up in office quality will be drawn to modern offices with lots of amenities, just as the economy is gaining steam. But soaring interest rates and the slow pace at which workers are returning to offices have even some risk-taking developers wary about the future. With office use only about half of what it was before the pandemic, some of the most active developers are postponing major projects and are losing their appetite for new developments. Some analysts took these and other comments by Chief Executive Steven Roth as a sign that Vornado might move slower than expected on its planned new office tower on the site of Manhattan’s Hotel Pennsylvania, which it is demolishing.


The national office vacancy rate stands at 12.5%, up from 9.6% in 2019 and the highest since 2011. Many companies have told workers to return to their offices after more than two years of remote work. But businesses also are adopting new workplace strategies that allow employees to work from home a few days during the week. As a result, tenants need less office space. Most businesses aren’t including expansion space when they sign new leases as they often did in the past. About 212 million square feet of sublease space is currently available, according to CoStar, a record high since 2005 when the company began tracking the metric.


Developers forging ahead say that demand remains strong for the highest-quality space with great locations and amenities such as restaurants, good views, fitness centers and daycare. Businesses adopting new workplace strategies feel it is worth paying higher rents for this space partly because they are leasing less and partly to encourage workers to return to the office for more days.


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New York Office Giants Face Deteriorating Demand For Offices After Summer Of Hope


Vornado Realty Trust executed just 229K SF of office leases at its New York City properties during the third quarter, which CEO Steven Roth said was “well below” its typical period. The average term on the deals was $88.99 per SF and 5.8 years during the quarter. Overall, Manhattan had a down start to the fourth quarter in office leasing. Some 1.9M SF of leases were signed in the borough in October. a 40% drop from September and a 41% drop year-over-year. The drop-off comes after the market saw a strong summer, when office owners and brokers said tenants were starting to get far more comfortable locking in long-term deals. Piper Sandler Senior Analyst Alexander Goldfarb, who covers REITs, said there is no doubt the mood among the big office landlords has shifted. Vornado saw net income fall to roughly $7.8M in the third quarter from $37.7M the prior year, it said in its quarterly earnings release Tuesday. Vornado expects to complete the demolition of the Hotel Pennsylvania in the fourth quarter of next year, but while it had planned to replace it with an office tower dubbed Penn 15, Roth cast doubt on the plan on Vornado's earnings call.


The company’s Farley Building development has 730K SF leased to Facebook’s parent company, Meta Platforms, which recently terminated a 200K SF lease on Park Avenue South four years early. Meta said last week it plans to spend $2B this year getting out of office leases, but Vornado executives said they don't expect any impacts on the Farley lease or at 770 Broadway, where Meta leases 800K SF. It is a similar story for most of the publicly traded office owners, who say interest rates and spooked tenants are the biggest issues in their business right now. BXP President Douglas Linde said on the company’s earnings call last week that economic uncertainty is affecting office space decisions with clients.


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Financial Tenants and New Eatery Headed to 277 Park Avenue


In the largest of the seven deals, M&T took 93,000 square feet on the 24th through 27th floors to relocate its regional headquarters from 350 Park Avenue in the first half of 2023. While the smallest deal, Burke’s Park Ave Kitchen is sure to cook up a lot of excitement as he plans to open his first new New York City restaurant in almost three years in 6,248 square feet at the base of the office tower in May 2023. The new Lemay + Escobar-designed eatery, decked out with chandeliers and a pink Himalayan salt wall, will hold a 148-seat dining room and a 49-seat market and cafè open for three meals a day. Burke also plans to provide catering services to tenants of the 50-story building between East 47th and East 48th streets.


Meanwhile, two tenants decided to defect from other Midtown properties to the Park Avenue tower. Intermediate Capital Group said goodbye to its at least 7,000-square-foot offices at 600 Lexington Avenue for 40,000 square feet across the 40th and 41st floors, while National Australia Bank ditched 245 Park Avenue for 24,000 square feet across the 19th floor of the building. Visa International picked up another 25,000 square feet, bringing its total footprint on the top two floors of the property to 50,000 square feet, while Imperial Capital decided to stick with its 12,000 square feet on the 20th floor. Private markets firm StepStone Group took 50,000 square feet across the 44th and 45th floors, though it was unclear if the company was expanding or moving from its 29,000-square-foot offices on the 31st floor of 450 Lexington Avenue. The leases leave just 100,000 square feet left in the 1.9 million-square foot office tower.


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NYC investment sales plummeted in Q3


Dealmakers traded $7.86 billion worth of commercial properties in the third quarter, a 30 percent decline from the second quarter, according to a report from Ariel Property Advisors. The 568 deals, involving 701 individual properties, represented declines of 25 percent and 28 percent from the second quarter, respectively. Those figures represent an improvement over the same period last year, when 557 transactions combined for $6.26 billion in dollar volume, although this year’s third-quarter total was largely inflated by a single office deal that closed for nearly $2 billion in September. The quarter-to-quarter drop off in late summer could be felt across nearly every asset class, including multifamily, industrial and development sites.


Deals for multifamily properties totaled $3.63 billion, down 30 percent from the previous quarter’s $5.15 billion, but up 13 percent from $3.21 billion a year ago. The 366 deals, which involved 445 apartment buildings, each represented declines of 23 percent from the second quarter, but increases of 13 percent and 15 percent from last year’s third quarter. Industrial properties saw the largest declines, both quarter-to-quarter and year-over-year. Sales of industrial assets, which include warehouses and manufacturing sites, plummeted 72 percent, from $1.22 billion in the second quarter to just $335.5 million in the third quarter. That’s down from $390.6 million in the third quarter last year. Sales of development sites fell by 31 percent, from $1.22 billion in the second quarter to $846.4 million in the third quarter.


There were 57 such deals in the third quarter, a 38 percent drop from the previous quarter, and a 22 percent decline from the same period a year ago. Still, dollar volume jumped 13 percent year-over-year. One asset class that saw dollar volume increase from the second quarter to the third was offices, which jumped 34 percent from $1.59 billion in the second quarter to $2.13 billion in the third quarter, nearly quadrupling the $536 million seen in the third quarter last year.