Manhattan’s Office Market Still Faces Record-High Availability, Slow Office Leasing
By Celia Young July 7, 2022 6:51 pm
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Manhattan’s struggling office market is not out of the woods yet.
The amount of square footage leased in the borough in the first half of the year is still 30.5 percent below pre-pandemic levels while the availability rate remained at a record high, according to Lee & Associates NYC’s midyear Manhattan office market report. Coupled with office market rents still at a five-year low, the stats don’t bode well for landlords, who could see further instability thanks to inflation and continued work from home, the report said.
In the second quarter, Lee pegged the availability rate at 18.3 percent in Manhattan, while data from Newmark and CBRE put the borough’s availability rate even higher.
“You’re not going to see a higher availability since we’ve been tracking statistics, which goes back to the mid-1990s,” said Jonathan Mazur, Newmark’s senior managing director. “While the great financial crisis was a Class A Midtown recession involving the financial sector, this downturn encompasses everyone in every market, so it’s a little more pronounced.”
Leasing activity wasn’t all doom and gloom. The 15.5 million square feet leased in Manhattan in the second quarter represented a 34.2 percent increase from the same period last year, according to Lee’s report. Midtown drove leasing in the borough with nearly 10 million square feet leased in the second quarter.
Downtown was a completely different story. The area saw just 550,000 square feet of leases signed in the second quarter, compared to an average of 2 million square feet per quarter before the pandemic, according to Lee’s report. Leasing activity remained at a five-year low in the neighborhood, likely due to a lack of new Class A space in the neighborhood, said CBRE (CBRE)’s Howard Fiddle.
One silver lining in Manhattan’s foundering office market has been Class A buildings, which has proved to be attractive to tenants. Market rents for Class A space in the second quarter were at $84.04 per square foot, less than $1 per square foot below the pre-pandemic quarterly average in 2017 through 2019, according to Lee. Meanwhile, the rents for Class B and C space were still 9.4 percent below the pre-pandemic average, according to the report. Class B and C rents did slightly increase from $56.20 in the first quarter to $56.22 in the second quarter.
But even within Class A buildings, the market is divided. Tenants showed a noteworthy preference for trophy buildings in the second quarter, with the availability rate for those properties at 14.1 percent at the end of the second quarter, 4 percentage points below the Class A average, according to Lee’s report. Both availability rates remained below the pre-pandemic average of 11.3 percent.
“For companies that are thinking about the return to the office, who are trying to recruit or need to have that more sophisticated space — I think that’s what’s driving the [demand for] trophy space,” said Sarah Orcutt, Lee’s director of research.
The other demand driver for Class A space is the sheer volume of it that became available this year — from 453,000 square feet at 30 Hudson Yards, to 139,000 square feet 5 Manhattan West, to 109,500 square feet at 225 Park Avenue South, according to the report
The glut of new space isn’t likely to slow down anytime soon. About 10.6 million square feet of new office space is under construction across Manhattan, and the Far West Side, Meatpacking District and Flatiron DIstrict all have more than 1 million square feet of new product under construction, according to Newmark. All those new offices, coupled with remote work, could push older properties to convert to other uses, said Fiddle.
“The pandemic situation, this concept of we don’t need office space as much, is something that’s all new,” Fiddle said. “I personally think that you’ll see availability rates come down when more of the office buildings are repurposed to something else. And that’s not a quick fix.”
Celia Young can be reached at cyoung@commercialobserver.com.
