Manhattan Office Leasing Sees Dive Then 11th-Hour Recovery in 2023

“I think in 2023, we were bracing ourselves for a pretty low market given where interest rates were and general economic uncertainty, and actually at the end of the day we found that we ended the year pretty strongly,” Andrew Lim, JLL’s New York director of research, told Commercial Observer. “If you think about how in February, March, when Silicon Valley Bank and Signature Bank failed, I think [the office market was] a little more resilient than maybe we would have thought nine months ago.”

While more space was leased, however, vacancy rates increased in Manhattan by 50 basis points to 17 percent quarter-over-quarter. But that was mostly because two new office developments — Vornado Realty Trust (VNO)’s Penn 2 at 2 Pennsylvania Plaza and SL Green (SLG) Realty’s One Madison Avenue — added 2.4 million square feet to the market.

If it weren’t for those two buildings, the vacancy rate for the fourth quarter would have risen only 20 basis points to 16.7 percent, according to Lim.

Another sign of stability in the market was average asking rents in Manhattan remaining nearly unchanged quarter-over-quarter at $81 per square foot, only a 1 percent decline of 84 cents per square foot since the third quarter.

This data was impacted late in the game, too, with some massive deals closing. That includes Paul, Weiss, Rifkind, Wharton & Garrison signing a relocation deal for 765,000 square feet with Fisher Brothers at 1345 Avenue of the Americas just last week. That deal was not only the biggest lease of the year for New York City but also for the whole country. 

Law firms made up 17.2 percent of all leasing volume in the fourth quarter, a trend that Lim said may be attributed to competition for talent in the legal realm. In other words, when firms see another firm upgrading its space, they all look to do that same, creating a cyclical nature of leasing patterns for law practices.

“It’s funny because law firms tend to move all at the same time, they kind of move as a pack, and as soon as one of the big firms makes a move, they all kind of look around and see what everyone else is doing and they follow suit,” Lim said. “Lawyers and attorneys can go from firm to firm, and a lot of that depends on the kind of office they have, what kind of setup they have with their partners and their associates.”

Not so long ago, it was tech and financial services that were migrating around, influenced by the prospect of attracting and retaining talent, according to Lim. That has largely changed as the tech sector dealt with a wave of layoffs in 2022 and 2023, leading many to put offices up on the sublease market in the city.

For the industries that are expanding, Lim said a stalled development pipeline due to high interest rates might be a life preserver to non-Class A office space, as growing companies simply move into larger but less glamorous offices.

“So you’re going to see a spillover to the next best [asset class],” Lim said. “We’ve already seen that with older but still good properties on Park Avenue, Bryant Park, Madison, and so that likely is going to continue just because there’s such a mismatch in that part of the market.”

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