Offices Priced Above $100 PSF Coming Back Faster Than Cheaper Space: CBRE
The $100-per-square-foot market for office leasing in Manhattan is coming back faster than spaces priced below this threshold, and that’s a good indication that flight to quality is the driving factor in the recent boost in Class A deals, according to a report from CBRE.
The borough saw 105 contracts for office space priced in the triple digits last year, up 114 percent since 2020 and 18 percent above a five-year average. Meanwhile, spaces priced below $100 per square foot still have exceeded pre-pandemic numbers.
That does not mean tenants are having to dig deeper into their pockets for work space.
“When you look at the calculation of what it’s going to cost them out of pocket, you add in the concessions, you see that even in the market for $100 deals, the net effective rent is still low,” Nicole LaRusso, CBRE (CBRE)’s tri-state director of research and analysis, told Commercial Observer. “The feeling in the market seems to be that landlords are feeling a little bit more optimistic about being able to raise their asking rents, but that there’s still a need to offer a lot of concessions in order to get a deal signed.”
LaRusso added that even though the market is soft, the fact that Class A space is surging drives home the argument that flight to quality still has its hold on the Manhattan leasing market.
“I don’t want to say price doesn’t matter, but tenants are willing to pay higher rents in exchange for better amenities, better located buildings, newer assets with great building systems,” LaRusso said. “$100 buildings fit that profile, generally speaking.”
With a building boom — and a renovation boom — taking place just before the pandemic, the additional supply actually generated demand for higher-class spaces. The migration to buildings with state-of-the-art HVAC, high-speed elevators, proximity to mass transit and other amenities that are now considered at the heart of a COVID-safe office was already underway,. The volume of this pricey space has increased 250 percent since 2016 to 11.1 million square feet as of the end of 2021, according to CBRE.
But rent prices could be reaching new heights, according to the brokerage. The market had not seen as many $150-per-square-foot transactions as it did in 2021 since 2016, and more $200-per-square-foot Manhattan deals were inked last year than in any previous one.
Financial sector tenants took the biggest share of space priced above $100 per square foot in 2021, 45 percent, but representing 69 percent of all deals for the year, CBRE indicated. Likewise, media and entertainment tenants signed 18 percent of high-end leases, but were only represented by 3 percent of deals.
“I think we feel pretty confident that the market is on a pretty strong, steady climb out of the low point from the pandemic,” LaRusso added.
Mark Hallum can be reached at email@example.com.