Leases  ·  Industry

Manhattan Office Vacancy Rate Hits Record High as Leasing Still Struggles

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Manhattan’s office leasing activity in the first quarter of 2023 was still slow, continuing a trend set in the last three months of 2022, and the borough’s vacancy rate hit a record high, according to reports.

Only 4.6 million square feet of office was leased in the first quarter of 2023 and Manhattan ended the quarter with a vacancy rate of 16.1 percent across the 470 million square feet tracked by JLL (JLL), according to the brokerage. That’s after Colliers found a 43 percent decline in leasing in the fourth quarter compared to the same period in 2021.

SEE ALSO: Distress Looms Over U.S. Offices Heading Into Summer: Report

And Class A trophy properties — which have thrived during this rough leasing market — have started to see some distress.

“Interestingly enough, big trophy rents have gone down this quarter, and that has a lot to do I think with the fact that there’s a lot of trophy sublease space on the market right now,” Andrew Lim, director of research for JLL, told CO. “When the macroeconomic headwinds got really strong towards the end of the year, there was a lot of trophy sublease space that was put on the market, which I think is just working its way through that.”

Average asking rents in trophy office properties dropped from $105.74 per square foot in the fourth quarter of 2022 to $103.49, while Class A went from $88.54 per square foot to $85.09 in that same period, and Class B slipped from $62.76 to $62.20, according to JLL.

But asking rents have been virtually unchanged since the pandemic hit, partly because that number has become less of a factor in leasing under the kind of distress landlords are facing, Lim said.

Landlords have offered extended periods of free rent to attract tenants and likely negotiated well below the asking rent to get space leased, especially considering that higher borrowing costs and decreased access to funding is hampering the ability of many building owners to add amenities.

“I think it really is a matter of how the market has fundamentally changed, whether asking rents are even relevant anymore,” Lim said. “I think it’s too soon. Once all the other options are exhausted in terms of the matrix of rent free months [and] flexible lease terms, I think landlords are either themselves wanting to keep the high asking rent or are being pressured to by their lenders. I think they’ll hold onto that as long as they can.”

Exacerbating the high vacancy rate was the completion of Brookfield Properties’ renovation of 660 Fifth Avenue, which brought 1.5 million square feet of additional office space to the market. 

Deals like Citadel’s master lease for Vornado Realty Trust’s 585,000-square-foot 350 Park Avenue in January carried numbers for the first quarter, Lim said, agreeing with a Colliers report that much of what momentum there was happened early in the year.

And the leasing activity that was there in the first quarter were mainly firms staying put.

A report from Savills released Thursday showed that 63.1 percent of leases in the first quarter were renewals.

Mark Hallum can be reached at mhallum@commercialobserver.com.