Class A Office and Tech Leasing Bright Spots in Manhattan CRE During COVID
Despite the plummeting leasing activity and the dramatic increase in sublease space, the coronavirus pandemic brought to Manhattan’s office market, Class A space — especially new construction — and technology companies signing deals have been some of the few bright spots, according to a new report from JLL (JLL).
The market analysis from JLL found that 96 percent of all leasing activity in the third quarter of this year came from Class A offices. And, while the wave upon wave of sublease space hitting the market has started to drive down office rents, especially in Midtown, the price for Class A spaces has seen some growth.
While the average asking rent for Class A space dipped by 2.6 percent compared to the start of 2020, it still grew from $79.56 per square foot in 2018 to $86.21 per square foot in the third quarter of 2020, according to JLL.
New construction — which JLL classifies as properties built or fully renovated since 2000 — asking rents dropped by 6 percent compared to the beginning of this year, but it still averages at $112.89 per square foot. That’s a nearly 98 percent increase from 2000, and higher than the 2018 average of $94.97 per square foot, according to JLL.
“While the pandemic has created a series of challenges, there are remarkable pockets of strength in the New York City office leasing market,” Peter Riguardi, chairman and president of JLL’s New York tri-state region, said in a statement. “The demand for new construction, in particular, has created powerful momentum for high-quality, newly constructed space.”
Even if its average asking rents haven’t been hit as bad as other sectors, the city’s marquee office properties have still been drawing bargain hunters in recent months.
A report from VTS found that tours of Class A and trophy office properties accounted for 70 percent of all tours in the city from June through October, up from the 55 percent they accounted for at the start of this year. VTS attributed the increase to the lower rents and additional vacancies caused by COVID-19.
One of the biggest takers of new construction has been tech tenants, which have steadily made up more and more of the city’s total leasing activity.
Tech companies accounted for 54.3 percent of new construction leasing in 2020 through the third quarter, and 76 percent of it in the quarter itself, according to JLL. That’s mostly due to Facebook’s massive 730,000-square-foot lease at the Farley Post Office redevelopment in August, the largest office lease in the city this year.
While tech only accounted for 3 percent of office leasing activity from 2006 to 2008, it was responsible for about 25 percent of all of Manhattan’s leasing activity since the start of the pandemic, according to JLL. Aside from Facebook’s deal, these include TikTok’s 232,138-square-foot lease at One Five One and Noom’s recent 113,000-square-foot sublease at 5 Manhattan West.
“New York City’s diversified tenant base, led by fast-growing technology companies, will continue to support office leasing as we move past current circumstances to a more stable environment,” Clark Finney, a managing director at JLL, said in a statement. “The industry continues to address the future role of remote work, but recent leasing has demonstrated the critical role of in-person collaboration, mentoring and work culture, as we look toward a future in which continued innovation will remain critically important.”
JLL also found that the Hudson Yards neighborhood fared better than others — largely due to its large makeup of new construction — with a vacancy rate of 3.3 percent as of Q3 2020, higher than the average of nearly 10 percent other submarkets have.
But, even as JLL found some positives in the city’s office market, 2020 has still been a bleak year for office leasing.
From January to November, Manhattan only saw 11.87 million square feet of office leasing activity, a 58 percent decrease from the 23.53 million square feet signed during the same time last year, according to CBRE.
The monthly low for Manhattan leasing was broken three times in 2020, most recently in November, with its 480,000 square feet of deals signed, according to CBRE (CBRE).
Most of the deals have been renewals, while Manhattan has started to see huge increases in sublease space. It stood at more than 16 million square feet in November, and it’s expected to hit 18 million square feet by year’s end. The borough’s availability rate also hit a 16-year high.
Frank Doyle, a vice chairman and the international director in JLL’s New York office, said that despite the grim 2020, the few pockets of strength give the city a path forward.
“This analysis points to resiliency in the office market that will be led by tech tenants and by high-quality, newly constructed and newly renovated space,” Doyle said in a statement.