Manhattan Office Vacancy Dips for the First Time in Two Years

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Demand for office space in Manhattan continued its downward slide in the third quarter of 2023, but the office vacancy rate dropped for the first time in nearly two years.

Office leasing activity across Class A and B buildings fell 18 percent compared to last quarter to finish at a total volume of 4.2 million square feet, according to a JLL (JLL) market report, which excludes Class C buildings. But the supply side is slowly pivoting, with overall vacancy dipping 16 basis points this quarter to 16.5 percent. 

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The last time office vacancy in Manhattan was on a downward path was the fourth quarter of 2021, according to JLL.

Sublease vacancy began to abate in the second quarter and continued falling to end the third quarter at 4.1 percent — a decline of 28 basis points quarter-over-quarter, according to JLL.

What the decline in subleasing vacancy comes down to is “companies deciding they actually need that space,” said Andrew Lim, New York research director at JLL. 

Tech and media companies — whose employees were among the early adopters of the work-from-home paradigm — initially showed the most enthusiasm for putting space on the market but now are hanging on to their offices, Lim said.

JLL’s brokers are observing more demand for conference rooms, employee lounges and congregating spaces, which is a positive sign because it indicates people still need offices, even if they look a bit different, he said. 

“The way that people use office space is now different,” Lim said. “A year ago, people were questioning whether they’d ever be back in the office.” 

This year started with tech companies and big banks taking a back seat to more nimble contenders like hedge funds and small private equity firms. But law firms are the bright spot in JLL’s third-quarter data. 

Though the sector makes up only about 15 percent of the market, law firms accounted for more than a quarter of the leasing activity heading into the second half of the year — significantly more than any quarter since JLL started tracking industry share of leasing volume in 2005.

Case in point: The largest deal of this quarter was signed by law firm Davis Polk & Wardell when it renewed its offices at 450 Lexington Avenue and expanded by 30,000 square feet, bringing its total footprint to 700,000 square feet.

Another law firm, Wachtell, Lipton, Rosen & Katz, also bolstered leasing activity in the third quarter with its renewal for 250,000 square feet at 51 West 52nd Street.

JLL researchers also have their sights on the development pipeline, which is expected to narrow significantly as the amount of office space under construction has been shrinking dramatically for some time. 

There’s currently 12.3 million square feet of office space under development in Manhattan, the lowest amount in seven years, according to JLL.

As supply of new construction dries up, demand will spill over from new construction to the next best thing: “pockets of older stock, high-quality office space that’s well located,” Lim said. 

“We’ll start to see action there,” Lim said. “Class B buildings that are far from the subway will probably continue to struggle.”

Abigail Nehring can be reached at anehring@commercialobserver.com.