New space brings downgrade to NYC office rents - Capital Economics
US Commercial Property

New space brings downgrade to NYC office rents

US Commercial Property Update
Written by Kiran Raichura
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The limited impact of the virus on New York City office construction means that we now expect at least 10mn sq. ft. of office space to be added across 2022-23. This could cause the vacancy rate to climb by 400-500 bps in the next three years. As a result, we are downgrading our rent forecasts for the city and expect asking and net effective rents to fall by 9% and 11% respectively by the end of 2023.

 

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  • The limited impact of the virus on New York City office construction means that we now expect at least 10mn sq. ft. of office space to be added across 2022-23. This could cause the vacancy rate to climb by 400-500 bps in the next three years. As a result, we are downgrading our rent forecasts for the city and expect asking and net effective rents to fall by 9% and 11% respectively by the end of 2023.
  • In our Q4 2020 Major Office Markets Outlook we highlighted a poor outlook for NYC rents. The structural change to demand that we have identified is likely to affect NYC disproportionately (see here and here,) given its costly office space, and workers’ long and expensive commutes. And the outlook for NYC is further dented by its substantial development pipeline, with a spike in new supply expected in 2022 and 2023.
  • In our Q4 forecasts, the peak of new supply occurred in 2022, at around 4m sq. ft., equating to 1.4% of existing inventory. That estimate assumed that the 13mn sq. ft. of office projects under construction would be substantially delayed by virus-related shutdowns and that projects due later in the forecast might be cancelled. But delays to commercial real estate construction have been less significant than we had previously thought. As a result, we now need to revise our forecasts for office space completions.
  • Admittedly, expectations for completions in 2021 are relatively low and are little affected by our revisions. The largest addition to inventory this year will be the 750,000 sq. ft. Farley Building, which Facebook has fully leased, increasing the social media company’s Manhattan office space by around 50%.
  • However, for 2022 and 2023 we are making significant upward amendments to our expectations. (See Chart 1.) In 2022, we think that a minimum of 6.5mn sq. ft. will complete, which would be the highest level in NYC since 1986. We have pencilled in a further 3.5mn sq. ft. for 2023.
  • Much of the space due to complete in those two years is accounted for by just three projects, all in the Hudson Yards submarket – 50 Hudson Yards, 66 Hudson Boulevard and Two Manhattan West. Signed tenants include Facebook, Blackrock and Pfizer. While 55% of this space is already pre-let and the remainder is likely to lease well, this will likely come at the cost of increased incentives and reduced rents.
  • But the bigger issue is that these additions to the market will add to the office inventory at a time when overall absorption is likely to be negative, prompting vacancy to climb by even more than we had previously forecast. We think the rate could climb by around 400-500 bps in the next three years, exceeding 13%. (See Chart 2.) This will disproportionally affect older buildings that don’t match up to occupiers’ requirements and will ultimately lead to costly refurbishments or conversions to other uses. Having previously expected average asking rents to fall by just under 7% by the end of 2023, we now think the fall is likely to be closer to 9%. The outlook for net effectives is worse, at closer to -11%.

Chart 1: NYC Office Completions (Million Sq. Ft.)

Chart 2: NYC Office Vacancy and Asking Rents

Source: Capital Economics

Sources: REIS, Capital Economics


Kiran Raichura, Senior Property Economist, kiran.raichura@capitaleconomics.com