Decades of under building brightens long-term outlook for new office space
A new report on the state of office construction in Manhattan points to a sluggish short term.
But, the New York Building Congress says, the long-term outlook is strong as decades of under-building in the office sector and increasing global demand for ultra-modern office space, means that the City can support, and requires, new office construction.
New office construction in the Manhattan central business district (CBD) will reach 2.1 million square feet in six buildings in 2012, up from 1.8 msf in seven buildings last year, according to a New York Building Congress analysis of ongoing and planned construction projects.
The Building Congress anticipates a decrease in 2013 to 1.7 msf of new office space under construction in six Manhattan buildings, while also forecasting a third consecutive decade in which less than 20 msf of new office space will be added to the CBD’s inventory.
From 2000 to 2009, 19 million square feet of new office space were created in 21 major buildings throughout the Manhattan CBD — an average of 1.9 msf per year. This increase in office supply, however, was offset by the destruction of the World Trade Center on 9/11/2001.
While the ‘00s represented stronger growth and higher density development than the ‘90s when just 10.7 msf were built in 19 buildings, the pace of new construction remains well below prior post-war decades.
In the ‘50s, the Manhattan CBD averaged nearly three msf per year of new office supply, while the ‘60s and ‘70s saw additions of 5.5 msf annually. Even the ‘80s, which experienced years with no office construction at all, averaged nearly five msf per year. While office employment in New York City remains below its peak of 1,788,000 jobs in July 2008, conditions have improved. A total of 38,000 office jobs were added in 2011, and another 36,000 office jobs have been added since January 2012.
This increase in employment has helped fuel a recovery in the office leasing sector.
According to Cushman & Wakefield, office vacancies declined to 9.1 percent in the first quarter of 2012, down from 10 percent in the first three months of 2011 and 11.6 percent during the same period in 2009.
Rents are rising as well. Newmark Grubb Knight Frank recently reported that asking rents in Manhattan averaged $52.78 psf.
According to CB Richard Ellis, 27.9 million square feet of office space was leased in Manhattan in 2011, up from 23.6 msf in 2010.
However, based on the first four months of 2012 and despite continued growth in employment, the Building Congress is projecting a decline in 2012 — to 22 msf of leased office space.
The projected decrease in leasing activity is based on a number of factors, including changes in user preferences.
Modern technologies and telecommuting trends are leading large Manhattan firms to opt for more efficient configurations and smaller workstations. While firms have historically allotted 250 square feet per worker, that allowance has dropped below 200 square feet per worker in many recent office renovation projects.
Last year’s spike in leasing activity also was likely a function of some companies playing catch-up on their office space needs after a period of great uncertainty about the economy.
In order to equal or top 2011, it is likely that job growth would need to increase further in the coming months, especially at firms that have excess corporate space available for sublease.
Developers for a significant number of major office projects have completed designs, secured necessary approvals and, in some cases, started pre-construction in anticipation of an improving economy.
Recent and contemplated rezoning initiatives also hold the potential for large-scale future office construction in Hudson Yards and the Grand Central district.
The immediate beneficiaries of New York’s under-supply are those developers who have been able to get shovels in the ground.
The Building Congress anticipates, for example, that 1 WTC and 4 WTC, should lease up without significant delay once they reach completion in late 2013 and early 2014.
Cushman & Wakefield vice chairman Tara Stacom, the leasing agent for the three msf One World Trade Center tower, noted, “Pending completion of a 273,000 s/f lease, the building will be approximately 55 percent pre-leased 18 months prior to completion.”
Conde Nast previously committed to be the tower’s anchor tenant and will move its 1.2 msf headquarters downtown upon the tower’s completion.
The same positive outlook will likely hold true for 3 WTC, the International Gem Tower and 250 West 55th Street, as well as 7 Bryant Park where construction will commence later this year.
While the pace of New York’s economic recovery should be enough to fill the towers that are going up, the Building Congress projects that additional planned and potential developments, such as 2 WTC, Hudson Yards, Manhattan West and 15 Penn Plaza, likely will not be able to start until late this decade and early next.
“Given the ongoing economic upheavals in Europe and uncertainties surrounding the potential impact of pending financial regulations, it is difficult to envision the type of near-term surge in the global economy that could fuel a sudden rise in office demand,” said New York Building Congress president Richard T. Anderson.
“It is promising, however, to note that the lack of near-term building does not signal a lack of will. The development community remains bullish on New York City’s future and will wait for the right conditions to turn their plans into reality.”
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