The Office Condo Market in New York City

Office condos are buildings with individual units that companies can purchase as office space. Though they are relatively new in the United States, they’re becoming increasingly common in big cities with limited space, such as New York City. Here is a quick breakdown of the office condo market in NYC.

Who is investing?

Nonprofit organizations are the largest classification of office condo buyers in New York City, making up 24% of buyers. For the approximately 25,000 nonprofits based in NYC, office condos are the ideal choice for office space because they’re the ideal size, and they’re economical. Nonprofit organizations benefit more from owning their office condos instead of leasing. Owning protects them from being forced to leave due to expensive rent. In addition, in the United States, nonprofit organizations are exempt from property taxes if they buy their office space. These tax exemptions can save them from $5 to $10 per square foot.

Missions and consulates of the United Nations make up 12% of office condo buyers in New York City. Their submarket has a vacancy rate of 3.5%, the lowest vacancy rate of all the submarkets in the city. Some of the governments buying office condos around the UN headquarters include Greece, Portugal, Switzerland, United Arab Emirates, and Saudi Arabia, to name a few. Just as with the nonprofit organizations, UN missions and consulates benefit more from owning instead of leasing. For one, the yearly cost of leasing for their submarket is approximately 85% more than the yearly cost of ownership. Government agencies are also exempt from property taxes when they own their office space instead of renting it.

Foreign companies looking to expand their businesses to the United States are another significant submarket. Though office condos are relatively new to the United States, they are common overseas, making them a familiar option for foreign companies. In Asian countries, especially China, there is cultural significance in owning property as opposed to leasing it. In New York City, foreign companies have invested approximately $5.5 billion in office space. Chinese companies alone have been known to pay from $900 to $950 per square foot for their office condos. Office condos in Chinatown sell out quickly, and as a result, more projects in NYC are catering to the foreign demographic.

The healthcare sector accounts for 4% of office condo buyers in New York City, but their demand is expected to increase as doctors move noncore medical services, such as dentistry and mental health counseling, out of hospitals. Their goal is to spread outpatient centers across all five boroughs so physicians can be closer to their patients’ homes and places of work.

Traditional businesses, such as those in the advertising, service, consulting, and technology sectors, have the largest demand for office condos, making up 37% of office condo buyers. These are typically companies expecting little employee growth and have a mostly online presence, which thrive in office condos. Between 2013 and 2025, such traditional businesses are expected to demand approximately 9.0 million square feet of office space.

Who is handling the sales?

CBRE

Cushman & Wakefield

Eastdil Secured

Eastern Consolidated

HFF

JLL

Marcus & Millichap

Rosewood Realty Group

Savills Studley

Westwood Realty Associates

Rudder Property Group

Douglas Elliman

Prime Manhattan Realty

Time Equities Inc

Active Neighborhoods

Of all office condo sales in New York City, Manhattan is the most popular location, accounting for 63% of sales in the second half of 2016. Within Manhattan, Midtown is the most active submarket. About half of the total office space in Manhattan lies between 31st Street and 59th Street, 75% of which is Class A space. In 2016, sales in Midtown totaled approximately $214M. Sales in Downtown Manhattan totaled approximately $55M the same year, making it the second most active submarket. Finally, Midtown South was the third most active submarket with sales in 2016 totaling $34M. However, the vacancy rate in Midtown South is 7.1%, lower than other Manhattan submarkets, despite being 80% Class B and C space. This is likely because of the attractive pre-war buildings and the independent owners providing leasing flexibility. Outside of Manhattan, Brooklyn is increasing in popularity, especially Downtown, which contains 65% of Brooklyn’s office space. In 2016 alone, there was a 145% increase in consideration for office condos there.

Pricing

In Manhattan, the price of an office condo per square foot varies by location and class. In Midtown, Class A space averages to $73/sf. Classes B and C space ranges from $38 to $48/sf. In Midtown South, Class A space averages to $67/sf, Class B space averages to $54/sf, and Class C space averages to $44/sf. Downtown, Class A space averages to $45/sf. Classes B and C space ranges from $31 to $35/sf.

Cap rates

Capitalization rates, or cap rates for short, is the ratio of net operating income (NOI) to the property asset value. They are used to show the rate of return on an investment and gauge investor demand. In Manhattan, as of 2015, the average cap rates on office condos were 3.1% Downtown and 3.0% Midtown. In Brooklyn in the same year, cap rates on office condos averaged to 3.4%. Since 2009, cap rates have been steadily declining. Today, they’re at an all time low, suggesting expensive prices and low returns.

Financing

In New York City, using a bank to help finance office space is becoming less common. As the average size of a deal is growing, people are turning to private lenders. Mezzanine financing is, in Investopedia’s words, “a hybrid of debt and equity financing that gives the lender the rights to convert to an ownership or equity interest in the company in case of default.” This was the trend in 2016, with companies such as RKR, Kushner Companies, Moinian Group, providing mezzanine loans to other developers for office condos.

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For more information on office condos in New York City, check out the following links:

On who is buying

On the market in each borough

On the cap rates

On alternative lending

Mortgage Rates

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