"Steady demand from traditional businesses, tech heavyweights, forward lease commitments for new developments, and unprecedented leasing by flexible workspace providers, resulted in record leasing activity in 2018. Even so, availability barely budged from a year ago, because of new developments coming on line. Net effective rents have actually decreased as concessions rise. "

William Montana, Senior Managing Director

Manhattan's ownership landscape has changed hand-in-hand with its transformed skyline. Heightened institutional ownership, and a more diversified economy, should support a sounder financial footing for the office sector."

Erik Schmall, Vice Chairman

Savills Studley Report New York City office sector Q4 2018

Savills Studley Research New York City

SUMMARYMarket HighlightsAVAILABILITY PUSHES LOWER

Manhattan’s overall availability rate decreased, falling from 11.3% to 10.7%, but has decreased by merely 30 basis points from a year ago. The Class A availability rate fell by 60 basis points to 11.9%, with a 50 basis point decrease in Midtown to 10.6% and a 180 basis point decline in Downtown to 15.8%.

RENT RISES

Manhattan’s average asking rent rose by 1.8%, from $74.99 to $76.36 in the fourth quarter. The Class A average rent increased by 2.5% to $87.90 in the quarter.

RECORD LEASING IN 2018

Leasing volume exceeded 10 msf for the second quarter during 2018, totaling 11.9 msf. Tenants leased just under 40 msf during 2018, a 14.3% jump from 2017 and the strongest annual volume in several years.

INVESTMENT SALES RISE

Office property sales through November 2018 totaled $16.1 billion, a 24% increase compared to the same period during 2017.

02

Savills Studley Report | New York City

Halcyon Days

Manhattan’s most seasoned landlords and brokers must surely realize that the current conditions at work in the office market are far from normal. There is a disconnect between labor markets and office space demand. Leasing activity is running way ahead of hiring. Employment growth in office-using sectors has been tepid in the last 12 months, increasing by only 0.6%. And yet, leasing volume this year will be just shy of 40 msf.

The 73.9 msf leased since 2017 equates to more than 15% of building stock. In comparison, during the last two “rally periods” – 2000 to 2001 and then 2004 to 2005 – volume totaled 65 msf and 63.8 msf. Office using employment now exceeds 1.4 msf, an increase of more than 15% from peak levels attained in the two prior cycles. Construction activity in these two preceding peaks totaled 13.0 msf and 21.8 msf.

The record leasing is tied to several factors. Three stand out – the tech sector's recoding of the market’s industry DNA, the proliferation of coworking and the biggest development pipeline since the 1980s. By the numbers, there is no mystery to this surge over the last two years: TAMI firms leased 10.5 msf, coworking providers took another 5.0 msf. Finally, a wide cross-section of industries leased 4.3 msf in newly constructed properties.

Tech Recode

Manhattan’s industry makeup has been recoded in the last several years. TAMI leasing has been the catalyst for expansion in this cycle. By and large, these are not fly-by-night operations. Most of the leasing is coming from global tech icons that are engaged in a battle for New York City’s talent. Amazon has captured the spotlight of late, but Google has been rapidly expanding in Hudson Square for years. The firm's local footprint began with a small advertising sales office in 2000 and has grown to roughly 7,000 employees. In December it announced plans to double to more than 14,000 people over the next decade. Amazon and Facebook now each have more than 2,000 employees locally. Of note, Amazon’s push to Long Island City is reportedly meant to take aim at web advertising and take some market share away from Google.

Another Day Another WeWork

Real-estate-as-a service also boosted

Source: Bureau of Labor Statistics

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60Millions

NYC Off. Emp. NYC (% Annual Change) U.S.(% Annual Change)

Office-Using Employment Trends

$80.27$78.27

$81.77

$73.02

$63.38$65.23

$0

$20

$40

$60

$80

$100

Q4 '18Q3 '18Q2 '18Q1 '18Q4 '17

Overall Rental Rate Trends

Midtown Midtown South Downtown

Asking Rent Trends (All Classes) ($/sf)

10.6%11.0%

8.6%8.9%

13.1%13.2%

0%

5%

10%

15%

Q4 '18Q3 '18Q2 '18Q1 '18Q4 '17

Overall Availability Rate Trends

Midtown Midtown South Downtown

Availability Rate Trends (All Classes)

savills-studley.com/research 03

Q4 2018

Tenant Sq Feet Address Market AreaDeutsche Bank 1,100,000 One Columbus Cir Columbus CircleBloomberg* 468,000 120 Park Ave Grand CentralRalph Lauren^^ 350,000 601 W 26th St ChelseaPeloton 312,000 441 9th Ave Hudson YardsMillennium Management 300,000 399 Park Ave Plaza IIGoogle 266,021 315 Hudson St Hudson SquareWeWork 236,000 1440 Broadway Penn Plaza/Times Square SouthTwitter^^ 215,000 249 W 17th St ChelseaCahill Gordon & Reindel 201,621 32 Old Slip Financial DistrictGoogle 178,767 345 Hudson St Hudson Square

Sum of Leases 3,627,409

leasing volume over the last two years. Coworking companies have leased nearly 5.0 msf in Manhattan since the start of 2017. WeWork accounts for more than 3.0 msf of this total. Many small businesses and some entrepreneurs (including some that may not show up in employment numbers) are opting for coworking space. Google is the first firm that landlords around Hudson Square turn to; WeWork has become the saving grace for owners saddled with a big block of commodity space. Few question the longevity of Google’s impact in Midtown South, but some of the coworking footprint will surely come back to market in a future downturn.

Construction Tsunami

Perhaps the most impactful trend of this cycle has been Manhattan’s construction boom. More than 16 msf has delivered since 2010, and another 18.5 msf is currently underway. This is Manhattan’s biggest development boom since the 1980s. This long overdue space brought tenants into the market earlier than usual. It helped that the wave coincided with a sea-change in how businesses view their workplace as a branding, recruiting and retention tool. Over the last few years tenants have been signing very forward-looking leases – in most cases, several years ahead of occupancy. Extensive relocation activity has also forced redevelopment of buildings that lost tenants to Hudson Yards and Manhattan West.

Hudson Yards was just the opening act for the Far Westside. By 2025 Manhattan could have an additional 10 to 15 msf with development split between Midtown West and Penn Plaza/Westside. Vornado is moving ahead with significant work in Penn Plaza. It is just an anchor tenant away from forging ahead with the long-awaited redevelopment of Hotel Pennsylvania. The Farley Building, Two Penn and Hotel Pennsylvania will all be top contenders to land the largest tenants with lease expirations in 2020 and beyond. Within the next several years the distinction between the Far Westside and Times Square may blur as an office corridor from 11th Avenue to 8th Avenue takes shape.

The rise of Hudson Yards and Manhattan West, coupled with strong demand in Midtown South has put the squeeze on tenants in Penn Plaza/Times Square South. As recently as a couple of years ago this was still Midtown’s value-play submarket with the most amount of sub-$60 space options in Midtown. Owners in the surrounding blocks stand to capture

a strong upside in the coming years, but tenants with looming lease rollovers can expect a big jump in rent.

High-Octane Equilibrium

Manhattan’s economy and office market should emerge from this cycle on stronger footing. The financial sector is still the core catalyst for demand in the office market and economy, but TAMI has dug its roots in much deeper. Tenants also largely got what they needed in this cycle, an infusion of new space as well as generous build-out packages. An odd high-supply/high demand equilibrium has prevailed in Midtown and Downtown over the last two years. Even with record leasing, availability has barely budged, ending 2018 at 10.7% - down only 30 basis points from year-end 2017.

The city will also come out of this cycle with significant changes to its ownership. Institutional landords flush with capital from

equity markets and foreign investors have spent hundreds of million of dollars, if not billions, to create new cities (Hudson Yards) or revamped superblocks (Rock Center and Brookfield Place). Many of these owners are better equipped to ride out a future downturn or a pullback in the coworking sector. Any significant contraction in foreign investment, or additional spike in borrowing costs would impair future development. It may also jeopardize continued record concessions, particularly improvement allowances that are critical to mitigating soaring construction costs.

It is likely that 2017 and 2018 will end up being the peak years for this cycle. Can 2019 come close? Even if leasing falls by 15% from 40 msf, that would still equate to more than 30 msf. So far 2019 is not shaping up to have a big dropoff. Barring a sharp decline in business optimism, the flight to quality seen of late is expected to continue. Volatility in equity markets and the nation's capital could dampen demand, though.

Rental Rate Comparison ($/sf)

Major Transactions

*Renewal ^^Expansion

$115.39$110.10

$99.60$98.05

$86.21$84.53$82.70$82.32$81.77$80.51$80.27

$77.68$76.36$74.23$74.13$72.53$71.85$69.84

$67.36$63.38$61.96

$57.56$52.50

$34.69

$0 $30 $60 $90 $120 $150

Plaza NorthHudson Yards

Greenwich VillageSoho

Union SquarePlaza South

Times SquarePark Avenue South

Midtown SouthChelsea

MidtownHudson Square

ManhattanGrand Central

Columbus CircleTribeca

East Side / UNWTC/Brookfield Place

FlatironDowntown

Penn Plaza/Times Square SouthFinancial District

City HallUS Index

5.7%6.5%6.9%7.1%7.5%8.0%8.4%8.6%9.1%

9.8%10.1%10.4%10.5%10.6%10.7%10.7%10.8%11.3%11.6%

12.3%13.1%

15.8%16.4%

17.9%

0% 5% 10% 15% 20%

City HallGreenwich Village

Hudson SquareUnion Square

ChelseaFlatiron

East Side / UNMidtown South

Penn Plaza/Times Square SouthHudson Yards

TribecaGrand CentralTimes Square

MidtownManhattan

Columbus CircleSoho

Plaza SouthPark Avenue South

Financial DistrictDowntown

WTC/Brookfield PlacePlaza North

US Index

Availability Rate Comparison

Savills Studley Report | New York City

04

Map Submarket Total

SF(1000's) This Quarter This

Quarter

%Change

fromLast Qtr.

YearAgo

ThisQuarter

ppChange

fromLast Qtr. (1)

YearAgo

ThisQuarter

%Change

fromLast Qtr.

YearAgo

Columbus Circle 28,365 1,339 3,047 4.8% 2,554 10.7% 0.5% 9.0% $74.13 -4.1% $74.35Columbus Circle - Class A 20,062 1,305 1,852 -0.4% 1,394 9.2% 0.0% 6.9% $80.97 -4.4% $80.38Times Square 34,130 512 3,586 23.4% 3,723 10.5% 2.0% 10.9% $82.70 10.3% $83.37Times Square - Class A 29,320 406 3,172 31.7% 2,385 10.8% 2.6% 8.1% $86.02 4.2% $90.30Hudson Yards 9,264 461 911 -0.4% 282 9.8% -3.1% 4.0% $110.10 6.2% $81.31Hudson Yards - Class A 7,957 441 827 -7.6% 171 10.4% -5.2% 3.0% $115.72 10.5% $110.94Penn Plaza/Times Square South 54,836 1,654 5,012 -9.0% 5,222 9.1% -0.9% 9.5% $61.96 -2.9% $62.03Penn Plaza/Times Square South - Class A 7,730 157 518 -24.2% 770 6.7% -2.1% 10.0% $88.02 2.0% $81.69Plaza North 20,683 250 3,384 -0.3% 3,644 16.4% 0.0% 17.6% $115.39 4.4% $102.70Plaza North - Class A 16,551 221 2,845 -3.2% 3,210 17.2% -0.6% 19.4% $124.12 6.8% $106.83Plaza South 33,152 903 3,758 -7.3% 4,195 11.3% -0.9% 12.7% $84.53 -7.2% $90.92Plaza South - Class A 30,039 741 3,418 -7.4% 3,706 11.4% -0.9% 12.3% $86.08 -7.8% $94.04Grand Central 72,923 2,075 7,561 -5.6% 8,244 10.4% -0.6% 11.4% $74.23 0.5% $70.33Grand Central - Class A 38,937 1,447 3,839 -8.5% 4,678 9.9% -0.9% 12.1% $85.79 2.1% $77.94East Side/UN 20,589 455 1,728 -15.6% 1,879 8.4% -1.5% 9.1% $71.85 -0.5% $77.39East Side/UN - Class A 14,137 304 1,065 -21.7% 1,324 7.5% -2.1% 9.4% $77.69 2.1% $81.33

9 Chelsea 17,468 765 1,306 -22.4% 1,948 7.5% -2.2% 11.3% $80.51 6.1% $73.73Chelsea - Class A 1,059 33 333 0.0% 376 31.5% 0.0% 47.3% $138.25 2.2% $129.54

10 Flatiron 14,028 312 1,125 2.3% 1,057 8.0% 0.2% 7.5% $67.36 4.5% $67.33Flatiron - Class A 858 N/A N/A N/A 58 N/A N/A 6.7% N/A N/A $57.00

11 Park Ave South/Madison Square 20,508 334 2,380 26.6% 1,608 11.6% 2.4% 7.8% $82.32 11.8% $66.30Park Ave South/Madison Sq. - Class A 3,776 N/A 396 297.9% 0 10.5% 7.9% 0.0% $125.52 28.1% N/AUnion Square 8,208 341 583 17.0% 583 7.1% 1.0% 7.1% $86.21 15.0% $75.68Union Square - Class A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/AGreenwich Village 7,505 88 489 -15.5% 582 6.5% -1.2% 7.9% $99.60 9.7% $79.79Greenwich Village - Class A 995 0 180 -7.6% 75 18.0% -1.5% 9.1% $162.82 29.1% $127.05

14 Hudson Square 10,140 579 697 -39.8% 939 6.9% -4.5% 9.3% $77.68 3.9% $76.65Hudson Square - Class A 2,211 24 372 9.1% 251 16.8% 1.4% 11.4% $81.43 7.7% $87.24

15 Soho 4,590 125 497 -10.7% 593 10.8% -1.3% 12.9% $98.05 2.0% $84.10Soho - Class A 328 45 159 -20.8% 116 48.5% -12.7% 35.3% $127.47 12.4% $139.15

16 Tribeca 5,130 14 517 -31.3% 399 10.1% -4.6% 7.8% $72.53 2.9% $73.27Tribeca - Class A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

17 City Hall 4,387 132 252 43.8% 297 5.7% 1.7% 6.8% $52.50 0.2% $53.86City Hall - Class A N/A N/A NA NA N/A N/A N/A N/A N/A N/A N/A

18 WTC/Brookfield Place 31,711 668 5,016 -11.3% 5,579 15.8% -2.0% 17.6% $69.84 0.7% $73.36WTC/Brookfield Place - Class A 20,956 477 3,577 -9.2% 4,061 17.1% -1.7% 19.4% $74.74 1.3% $78.89

19 Financial District 48,091 907 5,906 -8.8% 5,500 12.3% -1.2% 11.4% $57.56 -0.4% $57.00Financial District- Class A 21,817 506 3,193 -11.1% 3,426 14.6% -1.8% 15.7% $61.53 -0.4% $60.48

1-8 Midtown 273,941 7,647 28,988 -2.5% 29,744 10.6% -0.4% 11.0% $80.27 0.2% $78.27Midtown - Class A 164,732 5,022 17,535 -2.8% 17,636 10.6% -0.5% 10.9% $92.58 1.1% $89.18Midtown South Total 82,446 2,544 7,077 -5.1% 7,310 8.6% -0.5% 8.9% $81.77 7.5% $73.02Midtown South - Class A 9,227 102 1,440 23.2% 876 15.6% 2.9% 10.0% $121.94 11.5% $113.68Downtown Total 89,318 1,722 11,690 -10.5% 11,776 13.1% -1.5% 13.2% $63.38 -0.1% $65.23Downtown Total - Class A 42,774 982 6,770 -10.1% 7,487 15.8% -1.8% 17.5% $68.51 0.7% $70.47Manhattan Total 445,705 11,913 47,755 -5.0% 48,830 10.7% -0.6% 11.0% $76.36 1.8% $74.34Manhattan Total - Class A 216,732 6,107 25,746 -3.7% 25,998 11.9% -0.6% 12.2% $87.90 2.5% $84.62

LeasingActivity

AvailableSF

AvailabilityRate

Asking RentsPer SF*

1

2

3

4

5

9-15

7

8

16-19

6

12

13

@SavillsStudleywww.savills-studley.com

Please contact us for further information

*Rent and availability rates in submarkets with a limited amount of inventory are sometimes subject to large fluctuations.(1) Percentage point change for availability rates. Unless otherwise noted, all rents quoted throughout this report are average asking gross (full service) rents psf. Statistics are calculated using both direct and sublease information. Short-term sublet spaces (terms under two years) were excluded.

The information in this report is obtained from sources deemed reliable, but no representation is made as to the accuracy thereof. Statistics compiled with the support of The CoStar Group. Copyright © 2019 Savills Studley

Savills Studley399 Park Avenue11th FloorNew York, NY 10022(212) 326-1000

Chairman & CEOMitchell S. Steir msteir@savills-studley.com(212) 326-1000

Corporate Research ContactsKeith DeCoster - Director, U.S. Analyticskdecoster@savills-studley.com

Lesley Kamnitzer - Research Managerlkamnitzer@savills-studley.com