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Bigger Leases and Pricier Deals Mark Manhattan’s Office Market This Year

Key Transactions Reflect Rezoning, Hudson Yards Demand
September 7, 2018

Shared work spaces, a rezoning of the eastern part of midtown Manhattan that may add 6.8 million square feet of commercial space, and development of the Hudson Yards district are shaping a surging office market this year in New York City.

According to CoStar data, no fewer than 26 office leases have been signed in excess of 100,000 square feet each. That compares to 20 of leases of that size in the same time in 2017 in the nation's largest office market.

There are more higher-priced deals this year than last. So far, a total of eight buildings have traded above the $400 million mark, compared to five in the same time last year. This year has already had two high-profile office deals trade above the $1 billion mark.

According to Market Analyst Lauren Baker with CoStar Market Analytics, many sales attracting notice were transacted as partial-interest deals, meaning a deal in which multiple parties invest and take a percentage stake such as in a joint venture.

With its dominant market size and the high-profile nature of the New York market, office projects in the city tend to attract attention beyond its region. So here’s a roundup focusing on some of the city's largest leases and sales deals completed year-to-date in the CoStar database.

Top 5 Office Leases

1. In the largest lease signed to date, Pfizer agreed to take 798,278 square feet at The Spiral, thereby anchoring the 2.8 million-square-foot glass edifice that Tishman Speyer is constructing at 66 Hudson Blvd. Pfizer will relocate its headquarters from 235 E. 42nd St. to Tishman's new tower in 2022, where it will occupy 15 floors plus a portion of the lobby level.

This transaction is another case of tenants seeking more efficient space, Baker said. In light of a 4 percent unemployment rate in New York City, employers are using new office space to attract and retain top talent, she added.

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2. JP Morgan Chase’s agreement to anchor 390 Madison Ave. with a 417,178-square-foot lease marks the second-largest office deal signed in the city to date. The 10-year lease is an interim step for the financial conglomerate – JP Morgan Chase will occupy one-half of L&L Holding’s 850,000-square-foot building as it awaits the completion of new corporate headquarters, being built on the site of its existing 270 Park Ave. tower.

"As JP Morgan looks to take advantage of the new midtown East Rezoning, they are signing large leases in Midtown," Baker said of the 390 Madison Ave. transaction.

New York-based OC Development Management is leading redevelopment of the space, with president Jonathan Ninnis telling CoStar News in an interview that he expects JP Morgan Chase to begin moving employees in later this year.

"The financial sector has seen a huge uptick in recent quarters," Baker said, pointing to a recent New York City Comptroller report that found the banking sector, a key driver of the city’s economy, performed strongly as a result of higher interest rates, lower corporate tax rates, and deregulation. Strong growth in bank profitability was driven by modest growth in pretax income and a steep decline in taxes, the report found.

3. In April, multinational law firm Latham & Watkins signed for 406,671 square feet at 1271 Avenue of the Americas, a 48-story office building nearby Rockefeller Center. Latham & Watkins will occupy floors 25 through 34 after relocating in the second half of 2020, according to Rockefeller Group, which owns 1271 Sixth.

Until then, Latham & Watkins’ 450 New York-based attorneys operate from 885 Third Ave., also known as the Lipstick building.

"Many factors informed our decision to move to 1271, including its central midtown location, architectural significance and top quality renovations, coupled with the opportunity to design a new office," managing partner Michele Penzer said of the move.

New York-based Law firms have made 2018 a year for staking out relocations. According to data from CoStar Market Analytics, about 1.4 million square feet of space has been leased by 30 law firm tenants so far this year, compared to 1.15 million square feet by 96 tenants in the same time last year.

4. Pfizer makes another appearance on the list, with its July lease signing for 350,000 square feet of space at 219 E. 42nd St. In this transaction, Pfizer sold what was its original headquarters to life sciences REIT Alexandria Equities for $142 million, or about $406 per square foot. It then leased back the entirety of the building. Pfizer’s decision tides it over for the coming headquarters space at The Spiral.

Following Pfizer’s exit from 219 E. 42nd St., the building will be transformed into a life sciences center, said John H. Cunningham, executive vice president and New York City regional market director at Alexandria Real Estate Equities Inc.

Life sciences companies are making moves in a still tiny but surging sector of demand for Manhattan commercial real estate that analysts say has been under the radar, CoStar News reported this summer.

5. Omnichannel retailer J. Crew Group is another of the many companies playing musical chairs in the pursuit of newer office space in 2018.

This summer, it signed a 324,658-square-feet sublease with Bank of New York Mellon Corp. at Brookfield Place's 225 Liberty St. It will relocate from its 295,000-square-foot base at 770 Broadway in stages this year.

Robert Martin, a vice chairman at Jones Lang LaSalle who was part of the team working on the deal, said "J.Crew was able to monetize the value of its below-market lease and to reduce its occupancy costs and upfront capital investment by relocating to nicely built sublease space at below-market rent.”

J. Crew’s agreement rounds out the largest transactions signed thus far this year, according to CoStar data.

And as J.Crew decided to exit 770 Broadway, Facebook stepped in with an agreement to expand by 295,000 square feet, effectively assuming the space being vacated by J.Crew Group. It is the third expansion by Facebook within the same property. The deal makes Facebook an anchor at 770 Broadway, as the largest tenant within the 1.15-million-square-foot Greenwich Village building. Its offices there span roughly 689,000 square feet.

Top 5 Office Sales

1. At 75 Ninth Ave. Google flexed the strength of its wallet when it agreed to acquire the Chelsea Market building at 75 Ninth Ave. for $2.39 billion. The transaction price for the 1.18-million-square-foot masonry building amounts to a whopping $2,017 per square foot, according to CoStar data.

With the deal, Google may be carving a campus for itself within the neighborhood. It maintains a 615,000-square-foot headquarters at 111 8th Ave., the 2.9 million-square-foot building it owns adjacent to Chelsea Market.

The deal exemplifies the pace of growth by tech companies in submarkets below Midtown South, Baker said.

2. The attention surrounding what Kushner Companies would do with its debt-heavy office condominium at 666 Fifth Ave. ended on a high note this summer.

Brookfield Asset Management stepped in to assume the entire leasehold interest on the 1.5 million-square-foot office condominium, carrying a 99-year term. Brookfield, a global alternative asset manager with roughly $285 billion total assets under management, said it is planning major upgrade work on the 1.5 million-square-foot office property, which it will operate in-house.

According to CoStar research, the purchase price was almost $1.29 billion, or $887 per square foot.

Timing of the deal saw Brookfield sidle in shortly after real estate investment trust Vornado reached an agreement to exit its 49.5 percent interest in the property, selling the share back to Kushner Co. in a transaction expected to close during third-quarter 2018. Vornado will net about $120 million in proceeds from the sale. The New York City-based real estate investment trust will also garner $58 million in net proceeds on its share of the mortgage loan. The entirety of that mortgage will be repaid.

Kushner Cos. had sold the stake in the 1.4 million-square-foot space to Vornado in 2011 for $646 million, or about $900 per square foot, according to CoStar data.

3. In the third-largest office transaction so far this year, Oxford Properties Group and Canada Pension Plan Investment Board closed their acquisition of the St. John’s Terminal Site at 532-550 Washington St. on the West Side. Oxford will be majority owner with 52.5 percent interest, and manage a planned redevelopment of the site on behalf of the joint-venture partners.

Oxford and the pension board acquired the property from Westbrook Partners and Atlas Capital, its previous joint-venture owners. The deal for the 1.2 million-square-foot office condominium property works out to about $3,600 per square foot.

Baker said the transaction is evidence of foreign capital investing in the New York market.

4. Another expensive summer sale was that of 5 Bryant Park, a 681,575-square-foot office building facing its namesake Midtown park. New York-based developer Savanna Group paid $640 million for the property, or $939 per square foot. The Blackstone Group LP had owned the 34-story building since 2011.

SREF IV Bryant Park Co-Invest LP, an investment group in the care of Savanna, has raised $117.5 million through eight investors, according to a recent Securities and Exchange Commission filing. The remainder of the financing was provided by Deutsche Bank, CoStar research has found.

5. In another deal involving institutional players, an affiliate of Invesco Group spent $633 million, or $939 per square foot, to acquire the Random House Tower located at 1745 Broadway near Columbus Circle.

The 777,695-square-foot property is fully leased. It was sold by New York office REIT SL Green Realty Corp. and real estate investment firm Ivanhoe Cambridge Inc. The two are frequent joint-venture partners.

"After securing a long-term lease [and] extension with investment-grade tenant Random House, and stabilizing the asset, we determined that this was the right time to monetize our success with the property and redeploy that capital into more accretive investment opportunities, including our share repurchase program," David Schonbraun, co-chief investment officer with SL Green, said of the deal.

SL Green, Ivanhoe Cambridge and The Witkoff Group had acquired the steel tower from Jamestown LP in December 2006 for $509 million, or about $755 per square foot, according to CoStar data. Witkoff later divested its interest in a year-end 2014 deal that consolidated management of the asset and saw SL Green's ownership stake increase from 32.3 percent to 56.9 percent in exchange for SL Green Operating Partnership units.

Diana Bell, New York City Market Reporter  CoStar Group   
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