Bigger, Faster, Younger: The Decade of Tech
NYC built 22 million square feet of office space, and all the headline tech names claimed their share
By Chava Gourarie December 17, 2019 9:30 amreprints
When the decade dawned, there were 920 football fields of available office space in Manhattan’s office market, according to a worried New York Times article.
Rents were declining, the financial industry was in ruins, and real estate experts were gloomy.
“I have been in the business for 12 years. I have never seen it this bad,” Marcus & Millichap broker Peter Von Der Ahe told the Times.
But before the year was out, the tide had already turned.
In September of 2010, Taconic Investment Partners put the block-long 111 Eighth Avenue on the market, prompting speculation as to whether it could get the amount it was asking. In December, Google bought the Art Deco building for $1.8 billion — the first of several significant investments in New York City over the decade.
Google’s purchase was indicative of the defining transformation of the decade for New York’s office market: the arrival of tech.
In the past decade, New York City became the indisputable tech hub of the East Coast, as all the major companies in the industry put down roots, startup culture flourished, and the city continued to attract the talent those companies desired.
As the decade closes out, that trend is only intensifying. Each of the FANG (Facebook, Amazon, Netflix, Google) companies have made significant commitments in the city in the last two years, including Google’s $2.4 billion purchase of Chelsea Market. Tech employment is consistently on the rise, maturing sectors like fintech and biotech are blossoming in the city, and tech tenants now occupy close to 35 million square feet of Manhattan, more than double what they did in 2010.
All of that was made possible by the huge increase in office development over the decade, as the city started delivering the product the millennial workforce wanted, creating and expanding entire submarkets like Midtown South, the Far West, Downtown and the outer boroughs.
That includes the delivery of mega developments like Hudson Yards and the World Trade Center — with floor plates large enough to accommodate the massive growth of the tech sector — as well as smaller developments in diverse markets, and the repositioning of older buildings as creative office space.
Manhattan’s office market grew by 22 million square feet over the decade, a 12 percent increase, said CBRE tri-state CEO Mary Ann Tighe.
“The office market absorbed all of that space without a hiccup. That’s what’s really the astonishing part,” she said. “We grew the stock by 12 percent, but grew occupancy by 16 percent, so it’s all been absorbed.”
The tech tenants also ushered in another important shift: the millennial workforce and its workplace culture, where the boundaries between work and life are blurred. In response, landlords scrambled to create product that appealed to this new workforce, giving rise to open floor plans, exposed ceilings, huddle rooms, bike rooms, the “five-to-nine” catchphrase, and an amenities space race. All that in turn led to the rise of coworking — which was both prompted and fostered by the startup economy post-recession — providing space for agile, flexible tenants to incubate and grow.
Any way you slice and dice it, the trends of the last decade — the development boom, the emergence of submarkets like Midtown South and Long Island City, the growth of coworking, and the shift in workplace culture — all lead back to tech.
When Doug Harmon brokered the sale of 111 Eighth Avenue to Google, he knew it was a big deal. The transaction “would shatter a record for the largest sale to a user in history and would send a seismic shock that would awaken the long-slumbering capital markets,” Harmon, who at the time was a broker for Eastdil Secured told Commercial Observer.
But he hadn’t predicted how big the effect would be.
“We could not have imagined the overwhelming positive impact the sale would have and continues to have on the Midtown South submarket,” Harmon said, who has since decamped to Cushman & Wakefield.
The purchase was a watershed moment, according to Bill Rudin, co-chairman and CEO of Rudin Management Company, and chairman of the Real Estate Board of New York.
“Google set the trend for West Coast-based tech companies putting a significant foothold into the New York market,” Rudin told CO. “Their brand, and who they are, it made other tech companies realize [that] for their business to be a global business, [they] needed to have a significant presence in New York.”
At the time, Midtown was still the center of gravity for Manhattan’s office market, but its aging office stock couldn’t keep up with the needs of modern tenants.
“Most tech tenants did not want to be there,” said Tighe. “That led to the growth of Midtown South — they didn’t want to be in conventional office buildings — and that market flourished.”
Fast forward to today and Midtown South has the highest occupancy rate in the nation, rents there have surpassed Midtown’s, and companies like Google, Disney and Netflix continue to double down on the area.
“Midtown South played a critical role in getting us started in attracting tech companies to New York City because it offered small, affordable space,” said Jeremy Moss, executive vice president at Silverstein Properties. “Today, companies are outgrowing Midtown South, and as we all know they’re moving to new buildings that can accommodate their growth, their tech needs, and their need to compete for talent.”
Buildings like Silverstein’s World Trade Center, for example.
In 2011, Condé Nast signed a $2 billion lease deal at One World Trade Center, proving the Downtown office market as a viable option. “When Condé Nast decided to move to Lower Manhattan after 9/11, that was a very significant move,” Rudin said. “Other companies followed suit.”
The World Trade Center buildings had been under development prior to 2010, but the market truly began to flourish as the buildings were leased and delivered, starting in 2013.
“It changed an entire neighborhood,” Moss said of the WTC development. “It transformed transit, it was the catalyst for the residential population here quadrupling, resulting in an influx of hundreds of restaurants, and creating a 24/7 community.”
Downtown is now the third largest office market in the nation, according to Moss, and blockbuster deals from Spotify, Uber and GroupM have continued to cement its image as a destination for tech and media tenants.
But while the neighborhood has come a long way, it’s not all rainbows and roses. Condé Nast — like so much of the print media industry — has been forced to slim down considerably, subleasing a quarter of the 23 floors it leased with so much fanfare. (Vogue’s Anna Wintour called the neighborhood “dreadful” in a New York magazine feature this October, describing it as “corporate, sterile and encumbered by security.”)
Still, Downtown wasn’t enough to satiate the appetite for New York office space.
Hudson Yards added close to nine million square feet of office space in four towers, which was quickly leased to tenants like BlockRock, Warner Media, Coach and now, Facebook.
“It’s a new type of city within the city,” said Jeff Blau, CEO of Related Companies, a model for the live-work-play environment. “That was really the vision, and now you’re seeing that come to life.”
And it could only have worked because of its scale. “The bet was that we could create enough critical mass to transform a neighborhood,” said Blau. “If you really think back a decade ago that was a pretty big bet.”
Bruce Mosler, chairman of Cushman & Wakefield, attributes much of the development boom to the foresight of the Bloomberg administration, which invested in infrastructure like the 7 line, and supported development projects like Hudson Yards.
“You can’t underestimate Hudson Yards, the criticality of that to making New York vibrant,” he said. “When you have product that has aged, it is essential to keep up with the times to develop new product.”
The lease-up of Midtown West has proven the need for it, and in general, most office developments have kept an eye on balancing supply and demand.
“This is the first time we’ve added significant new space, but this has been a disciplined approach,” Mosler said. “Most of it has gone up with an anchor tenant.”
In addition to the new submarkets — and we haven’t even mentioned the outer boroughs — Midtown East is poised for a resurgence, in part because of the Midtown East rezoning, which passed in 2017 after five years on the docket. That’s led to two of the most significant office developments of the decade: the JP Morgan Chase headquarters at 270 Park Avenue, and SL Green’s 1,401-foot-tall One Vanderbilt next door to Grand Central Station, which is scheduled to open in 2020.
That building demonstrated the high level of leasing activity among tenants from the traditional FIRE sectors, which have fully recovered since the recession. Future tenants at One Vanderbilt include TD Bank, McDermott Will & Emery, The Carlyle Group, and SL Green themselves.
The numbers demonstrate how much the map has shifted. Since 2009, rents in Midtown increased 55 percent, rents in Downtown increased 65 percent, and rents in Midtown South doubled from $40.53 to $83.67, according to data from CBRE. Similarly, total leasing activity increased by 17.5 percent in Midtown, doubled in Downtown from 4.2 million square feet in 2009 to 8.6 million square feet in 2019, and more than doubled in Midtown South, climbing from 3.3 million in 2009 to 7.7 million square feet, per CBRE.
A different map
While the primary driver for the emergence of new submarkets was the need for new product, there were other factors that allowed such far-flung developments to prosper.
They include residential and demographic shifts, as well as new modes of mobility, either by way of transit infrastructure, or innovations like Uber and Citi Bike.
“People shifted where they’re living,” said Tighe, with the biggest shift being the migration of the young, educated workforce to Brooklyn and Queens.
“We used to do the demographic survey and you’d have a big Westchester population, big Manhattan, big Northern Jersey, and then little slivers on the pie chart for the outer boroughs,” she said. “Now, it’s a totally different story.”
In addition, companies are now highly focused on creating a workplace that can help them compete in the race for talent. Whereas in the past, tenants insisted on being near transit hubs like Grand Central Station, primarily in order to cater to C-suite commuters from Westchester or Greenwich, now these same businesses prefer to cater to their employees who are arriving from Brooklyn.
“Just like our economy has diversified, so has the location,” said Rudin. “That’s important because it gives tenants optionality.”
But the role of transit in this shift is not entirely clear.
“The geography just flattened,” said Tighe. “Through the magic of our transit system, everyone can get to anywhere by transit — everything’s open.”
While the decade saw some significant upgrades to the transit infrastructure, including the completion of the World Trade Center Station and the Fulton Station hub, the Hudson Yards station on the 7 Line, and the expanded ferry service, most of it existed pre-2010 too. In addition, the city’s subway system is sub-optimal, and doesn’t reach many of the places that have flourished.
Perhaps it’s the rise of Uber and Citi Bike, both of which offer a sense of a more open and fluid city that have served to support a cultural shift that is less transit-centric. Those services have also bolstered certain areas like the waterside Brooklyn Navy Yard, which has seen the openings of Dock 72 and Wegmans, and boosted traffic to Dumbo and the Navy Yard.
Whatever the reason, geography plays a much smaller role now, and companies are much more concerned with the asset itself, and whether it has the design and amenities to keep and attract talent.
The “five-to-nine” workforce
It’s hard to believe that as recently as 2010, few people had heard of WeWork. If the startup came up at all, it was mostly considered a symbol of the fickle post-recession economy, or a playground for 22-year-olds with big ideas and a penchant for craft beer.
“At Midtown, we have a keg that flows all the time,” Adam Neumann told the New York Daily News in 2011. “Partitions and cubicles can be oppressive,” his partner Miguel McKelvey told the paper. “They are so boring. We offer light, room and independent space.”
After its spectacular fall from grace earlier this year, it can be easy to dismiss WeWork for its excess. But its effect on the office market and workplace culture is difficult to overstate. Not only did it give birth to the rise of the flex sector itself, and become Manhattan’s largest tenant, it also helped evangelize the millennial workplace culture.
Now, not a real estate conversation goes by without some mention of “amenitization” or “hospitality” in the office market. Every landlord in New York is seeking to amenitize his building with WeWork-like offerings, from flexible space to huddle rooms and roof decks, and there isn’t a company that isn’t looking to offer that to their employees.
And, with competition for talent foremost on everyone’s minds, landlords are convinced that tenants treat their buildings as recruiting tools.
“No matter what industry you’re in, you’re competing for the engineer that’s coming from MIT and is thinking about going to Google” or someplace similar, said Jeffrey Peck, vice chairman at Savills. And so, we return to Google.
In retrospect, it seems obvious that technology would have been the path to growth, but in the immediate aftermath of the recession that wasn’t so clear.
“In 2008 to , we lost 50,000 jobs and we thought that occupancy would go down,” Tighe said. “What’s fascinating is that we’re back up above our high watermark for finance sector jobs — but that’s not what did the magic, that was tech.”
Mosler agrees. “In the 90s, it was finance that was driving growth in the city; today what’s driving it is tech; it’s fintech; it’s tech proper; it’s the FANG companies. That’s the sector that’s growing the demand side.”
While the sector has been building up over the course of two decades, the last two years have seen explosive growth, particularly when focusing on the FANG companies.
In 2018, Google bought the Chelsea Market for $2.4 billion and announced a $1 billion campus at St. John’s Terminal; Amazon had committed to build its second headquarters in Long Island City; Netflix announced its Midtown South headquarters, and Facebook was actively searching for large blocks of space.
In 2019, Google purchased the Milk Building, Netflix committed to a $100 million production hub in Brooklyn, Facebook leased 1.5 million square feet at Hudson Yards, and Amazon leased office space in Manhattan and industrial space in Brooklyn, despite its ignominious retreat earlier this year.
These deals highlight the growth New York’s office market has experienced this decade, and whatever may come next, we’re entering 2020 on a high note.
“We’ve been in a very good cycle for a long time, and at some point we’re going to have to deal with a cycle that moderates,” said Mosler. “But for the moment we’re in a pretty enviable position.”