As a giant business hub, New York plays a key role in the commercial real estate industry. Delta Associates, the research affiliate of Transwestern, has observed six megatrends in the Big Apple.
1. The New York metro economy has outperformed expectations.
In late 2001, concern was prevalent that New York’s economy would struggle to recover from the 9/11 attacks. However, employment growth accelerated during the 2004 to 2007 period and growth in 2013 has exceeded the previous cyclical peak. The commercial real estate market in particular has benefited from this economic rebound, with New York’s share of investment sales volume in the major U.S. markets rising from 32.6 percent in 2001 to 35.3 percent in 2013.
2. Lifestyle changes have transformed downtown Manhattan.
Downtown Manhattan’s population has increased from 24,000 residents in 2000 to 60,000 residents in 2013, a 150 percent increase. This compares to a four percent increase for all of New York City during that same period. The redevelopment of the World Trade Center, and especially the co-located transportation hub, are spurring a revitalization of downtown retail that is attracting new residents and office tenants that previously would not have considered this submarket.
3. Densification has transformed the workplace.
Densification – or the reduction in square feet leased per office worker – is a national trend that is affecting New York. Tenants are seeking to reduce occupancy costs, in part by downsizing private offices and expanding teaming areas and collaborative spaces. Tenants want more flexible, modern and efficient accommodations. Delta Associates estimates that from 1997 to 2012, the amount of usable square feet leased per office worker in the New York metro declined from 178 to 164, and it is projected to decline to 153 by 2017. That represents a 14 percent decline over 20 years, which is limiting absorption of office space.
4. The live/work/play environment of Midtown South has spurred tenant interest in this submarket.
Google’s expansion in Midtown South has served as a catalyst for that office submarket. Tenant interest in the live/work/play environment has caused office rents to spike 15.1 percent in 2012 and 8.5 percent during the first nine months of 2013. Midtown South’s office vacancy rate, at 6 percent, is the lowest of Manhattan’s three major submarkets.
5. Office tenants are disrupting geographic norms.
While tenant types used to be pigeonholed into certain submarkets, office tenants are now willing to go to any part of Manhattan to find accommodations that are cost-efficient and appealing to the demographics of their staff. Proximity to transportation is driving many leasing decisions.
6. Despite the cost-conscious nature of today’s tenants, there is a flight to quality at the top end of the market.
The vacancy rate for Manhattan’s super-premium office space is just 4.4 percent, 390 basis points below the vacancy rate for all other space. High floors in super-premium buildings in Midtown’s Plaza District are achieving $140 to $200 per square foot in rent.
In Delta Associates' inaugural New York TrendLines® event, the research firm also gave an overview of the national economy, capital markets and highlights for specific key markets in the tri-state area. The full presentation can be viewed here.