The Real Deal New York

Commercial market report

From a 2Q construction boom to a new record for Manhattan office condos, a look at the biggest trends
By Chava Gourarie | September 01, 2018 09:00AM

New York City construction (Credit: iStock)

NYC construction surpasses pre-recession levels

Over 9 million square feet of new construction was completed in New York City in 2018’s second quarter, with 477 projects receiving a temporary certificate of occupation, according to an analysis by The Real Deal. The new construction was primary residential, with 8,200 new condo and rental apartments across 7.8 million square feet — a new record for the city that surpasses even pre-recession levels. While residential construction in Brooklyn was relatively low, with 1.3 million total square feet in the second quarter, Manhattan notched 2.5 million square feet and both the Bronx and Queens broke records. In Queens, out of 2.8 million square feet, a whopping 2.2 million were delivered in a two-block radius in Long Island City. And despite talks of a slowdown in the city’s hotel market in recent years, hotel construction is also on the rise. As of August, there were 20,000 hotel rooms in the pipeline, up from 8,000 in 2013.

Downtown leasing activity hits seven-year high

The downtown manhattan office market had its best season since 2011, with 1.9 million square feet leased in 2018’s second quarter, according to a report from the Alliance for Downtown New York. The leasing activity followed a subdued first quarter, bringing the total for the first half of the year to 2.7 million square feet. Despite the strong second quarter, the combined total for the first six months of 2018 was down 10 percent from the same period last year. The technology, advertising, media and information (TAMI) sector dominated the leasing activity, taking 36 percent of the space, followed by the finance, insurance and real estate (FIRE) sector, with 18 percent. Flexible office space accounted for another 7 percent of the activity. The largest second-quarter lease in the Downtown office market was J. Crew’s 325,000-square-foot deal at 225 Liberty Street, followed by McKinsey & Company’s space at 3 World Trade Center. The completion of the 80-story tower in June helped boost leasing activity, but it also raised the vacancy level to above 11 percent for the first time since 2014.

CMBS deals in New York hold strong

Nearly $5 billion of commercial real estate-backed debt has been issued on New York State properties through August, which is on par with previous years, according to data from Trepp. Of the $4.8 billion across 138 CMBS deals, 38 percent was backed by office properties and 25 percent was backed by mixed-use assets. The year’s largest CMBS loan to date is the $675 billion deal from a group of banks led by Goldman Sachs to refinance Independence Plaza, three 39-story apartment towers in Tribeca. The seven largest issuances — totaling $2.3 billion — were all single-asset deals on trophy properties. And despite fears of a retail meltdown and the fallout from securitized commercial loans that closed during the Great Recession, there have been few high-profile delinquencies. Trepp analyst Sean Barrie partly attributed the increase in CMBS loans on mixed-use properties in New York to retail’s struggles. “Mixed-use assets are becoming more popular, where retail space gets reimagined with different asset classes,” he said.

Manhattan’s office condo market reaches new heights 

Manhattan’s office condo market continued to gain steam in the first half of the year with 34 deals and $237 million in sales, according to a report from Rudder Property Group. The average price per square foot hit a record $934 — up 23 percent over the five-year average and up 6.7 percent from the previous record of $875 in 2016’s second half. The largest deal in 2018’s first half was the $20 million purchase of an office condo at 450 Fifth Avenue by Luxottica Group, a publicly traded Italian eyewear company. Manhattan’s office condo market is comprised of 10 million square feet, 2 percent of the city’s total office space. “The office condo market follows the leasing market,” Michael Rudder, Rudder Property’s founder and principal, noted. “When rents are expensive, tenants are pushed to consider other options.” He said he expects the owner-occupier market to grow and pointed to WeWork and Google as examples of companies buying their own office space.