Midtown’s Office Market Finishing a Decent 2023

The Plaza District in particular is showing solid leasing totals, while Third Avenue buildings continue to struggle

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The past year really has been a tale of two Midtowns.

Newer buildings and properties on Park and Madison avenues have been bright spots for the neighborhood while older addresses farther away from transit options, primarily along Third Avenue, haven’t been so lucky.

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“There is extraordinary segmentation in the market,” said John Maher, a vice chairman at CBRE (CBRE) who has several leasing assignments for buildings in Midtown. “The better buildings in the better locations with better owners are getting the preponderance of activity.”

Case in point, buildings built after 2000 in Midtown ended the third quarter with a 10.2 percent availability rate — essentially meaning that that segment favors neither tenants nor landlords — while the rest of the city and neighborhood remains well above that, according to Colliers (CIGI).

CBRE also expects Manhattan will have its second-best year of all time for deals crossing the $100-per-square-foot mark in 2023, with a large part of that boost driven by financial services tenants grabbing space in Midtown.

“The flight to quality is happening and it’s definitely apparent in Midtown,” said Mike Slattery, a research director at CBRE. “The high-end market is very strong, propelled by Midtown and the financial services.” 

On the other hand, Colliers found that Third Avenue ended the third quarter with a 22.8 percent availability rate while older buildings in the neighborhood hovered around a 17 to 19 percent availability rate, depending on their age.

“Third Avenue has historically been the most challenging of Midtown corridors,” said Franklin Wallach, executive managing director of research and business development for Colliers, citing its prepeonderance of older properties and its lack of transportation options.

Overall, the leasing market has softened in 2023, and Midtown hasn’t been immune to that.

The neighborhood saw about 3 million square feet of leasing activity in the third quarter, a slight drop from the 3.1 million square feet signed in the previous quarter and a nearly 33 percent drop from the 4.4 million square feet inked during the same time last year, according to Colliers. (CBRE’s numbers were even worse, with 2.9 million square feet in the third quarter, 16 percent behind Midtown’s five-year quarterly average of 3.4 million square feet.) 

Year-to-date, Midtown saw 7.92 million square feet of leasing activity, a 35 percent decrease compared to the same time last year, according to CBRE.

“It’s very difficult at the moment with so many influences affecting [companies’] thinking,” Maher said. “From geopolitical issues to the economy to the actual utilization of space … it’s a very challenging moment.”

Last year’s relatively strong leasing was driven largely by “pent-up, flight-to-quality demand,” but that has dried up a bit in 2023, and “we are still at a place where supply is outpacing demand,” Wallach said.

Midtown ended the third quarter with a 16 percent availability rate, according to Colliers’ calculations. And the number of leases for at least 100,000 square feet has declined.

So far this year, the neighborhood saw only six leases that cracked six figures, compared to the 20 inked in 2022, according to Lori Albert, the co-head of research in New York for Cushman & Wakefield (CWK).

“It really is uncertainty in the market,” Albert said. “A lot of the deals [this year] are lease expiration-driven or consolidations.”’

Midtown activity has primarily been spurred by financial services, long a stalwart of the neighborhood and one that has higher return-to-office rates than other businesses in the city, Albert added.

But, even with the dip in activity, Midtown still has been doing better than the rest of Manhattan.

Midtown South saw only 1.3 million square feet of leasing in the third quarter while Downtown saw 712,269 square feet, according to Colliers. Midtown South also hasn’t seen any six-figure deals this year while Downtown netted two, Albert said.

Manhattan’s overall availability rate was 17.9 percent in the third quarter, while Midtown South stood at 18.6 percent and Downtown had the highest at 21.3 percent, according to Colliers.

Midtown’s average asking rent stood at $82.68 per square foot at the end of September, better than Midtown South’s $81.73 per square foot and Downtown’s $57.19 a foot, according to CBRE.

Plus, Midtown accounted for three of the top five leases of last quarter, including law firm Davis, Polk & Wardwell’s extension and expansion to 700,947 square feet at 450 Lexington Avenue, according to CBRE. 

That’s not only the largest deal of the quarter, but also the biggest so far this year and the largest Manhattan has seen since Blackstone’s 720,000-square-foot expansion and renewal at 345 Park Avenue in 2021 (which happened to be in, you guessed it, Midtown).

“The Midtown story probably has the most positive story,” CBRE’s Slattery said. “It makes up the greater scale of leasing.”

Also, the glut of sublease space that has plagued the Manhattan office market since the start of the pandemic ticked down in Midtown by 20 basis points in the third quarter to a 4.3 percent availability rate, according to CBRE. The space left might stay on the market for a bit.

“Most of the nice space that is built and available for sublease has also gone away,” said Kirill Azovtsev, an executive managing director at Savills. “The space that is there sitting vacant is usually raw, or the buildings haven’t got the upgrades that they require to compete [for] the modern tenant.”

The neighborhood’s strength is clearly the Plaza District — which includes ritzy blocks along Park, Madison and Lexington avenues — which saw 249,000 square feet of leasing in the third quarter, blowing past its five-year quarterly average by 63 percent, according to CBRE.

“We’re starting to hear [about] competition for space and the repricing upwards of those buildings,” Slattery said. “And the availability rate is moving counter to the Midtown average.”

While the Plaza District has always been relatively strong, it got another shot in the arm in January when, after decades of planning, the Metropolitan Transportation Authority extended Long Island Rail Road service to Grand Central.

“That subtracted commute times for a lot of people,” Azovtsev said. “And the prestige of Park has always been there, and I think it’s here to stay as well.”

It’s not all sunny in Midtown. The neighborhood still has 11 million square feet of
available space — which was added mainly during 2020 and 2021 — that needs to be leased up.

“That 11 million square feet is still hanging there,” Colliers’ Wallach said. “And we are still expecting large blocks of space to enter this availability.”

That space includes accounting firm KPMG leaving 800,000 square feet spread across 345 Park Avenue, 560 Lexington Avenue and 1250 Avenue of the Americas when it vacates Midtown for 2 Manhattan West in Hudson Yards. 

All of Manhattan would also need to see about 10 million square feet of leases in the fourth quarter to match last year’s activity — which is not unheard of but might be unlikely in these uncertain times.

“I don’t think there’s all of a sudden going to be a zillion deals,” Cushman & Wakefield’s Albert said. “It will remain subdued. There are a lot of deals in the pipeline but the year will be down from what it was a year ago.”

Nicholas Rizzi can be reached at nrizzi@commercialobserver.com