NYC Office Market Improves But Availability Remains High

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Demand for New York City office space is improving, but vacant blocks in older buildings remain a drag on asking rents and availability rates across Manhattan, according to Colliers’ third-quarter market report.

The third quarter of 2022 marked the strongest period of leasing since the end of 2019, a bright spot for owners and leasing brokers in New York’s pandemic revival. With 9.2 million square feet of office deals, leasing volume was up 27 percent compared to the third quarter of 2021, when tenants inked 7.2 million square feet. 

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But despite the improved leasing, Manhattan’s availability rate for office remains high at 16.4 percent, compared to 10 percent at the end of 2019. Average asking rents were up slightly from a year ago — at $74 a square foot compared to $72 a square foot — but down slightly from last quarter’s $75 a square foot. 

Frank Wallach, the executive managing director for Colliers’ research arm, said that aging office stock — particularly in lower Manhattan and Midtown — accounted for much of the available office space in the borough. The Financial District’s availability rate was at 26 percent — the highest in Manhattan — in the third quarter. The neighborhood has some of the city’s oldest commercial buildings, with properties dating back to the 1700s. 

“Post-Great Recession, Downtown availability peaked at 17 percent,” said Wallach. “It took almost 10 years to become a 24/7 neighborhood and get down to 10 percent by the end of 2019. Those gains have unfortunately been reversed.”

Third Avenue in Midtown East — where most buildings were constructed between the mid-1960s and the early 1980s — has a similarly high availability rate of 24 percent. The vacancy rate would have been identical to the Financial District’s number if Memorial Sloan-Kettering hadn’t purchased 430,000 square feet of the Lipstick Building from SL Green Realty, taking that space off the market in a neighborhood already struggling with high vacancy. 

Ultimately, office demand will need to keep increasing if New York City hopes to return to pre-pandemic office leasing activity, Wallach said. 

“It depends on whether the demand can continue at the pace needed to create positive absorption,” said Wallach. “It would take numerous quarters to get there and demand would still need to outpace supply.”

He pointed out that several large blocks of space are scheduled to come on the market in the next year, including Paramount’s offices at 51 West 52nd Street, Cravath’s space at 825 Fifth Avenue and IBM’s Watson Group’s headquarters at 51 Astor Place. And many older buildings undergoing renovation — like Penn 2 — have multiple empty floors that haven’t hit the market yet. 

Rebecca Baird-Remba can be reached at rbairdremba@commercialobserver.com.