Asking vs. Taking Rents in Manhattan Office: The Gulf Is Widening

The more everything changed in the Manhattan office market, the more asking rents stayed the same.

Yet, a gulf has opened between these static asking rents and the taking rents that tenants actually pay. 

Manhattan asking rents averaged $80.92 a square foot in the third quarter of 2024, a 2.8 percent downward “correction” from the first quarter of 2020, covering both the pandemic and its lockdowns and the post-pandemic period, which has shaken all the previous assumptions about offices, according to brokerage JLL (JLL). This contrasts with a much steeper 26.8 percent slide during the Global Financial Crisis from 2008 to 2010, and the 22.8 percent correction during the dot-com bust and the impacts of the Sept. 11, 2001, terrorist attacks.

This time landlords have been reluctant to lower their asking rents to accommodate tenants, instead choosing to accommodate them through concessions like more months of “free” rent or higher tenant improvement allowances, said Andrew Lim, JLL’s research director for New York. It’s also reflective, he said, of the flight to quality that has marked this particular disruption. Owners of new, well-located and in-demand space are getting market-leading effective rents, and therefore not seeing the need to reduce rent.

Owners of sought-after properties are asking for market-leading rents “because they can,” Lim said.

“For the most part, people are meeting them at those levels,” he added. “If you look at overall market numbers, they don’t seem so great. But if you look at very specific pockets of the market … landlords feel like they’re in a much more favorable environment.” 

Lim identified Park Avenue north of Grand Central Terminal, the Plaza District and Hudson Yards as places that tenants willing to pay premium prices want to go.

And it is a premium — at least on paper. The reality is becoming a different story entirely. There are reasons for this divide. 

Manhattan office tenants seeking trophy space were facing asking rents averaging $144.30 a square foot at the end of the third quarter of 2024, the highest it’s ever been, according to JLL. For Class A space generally, the average was $83.76 a square foot.

The net effective rent for trophy space — the rent accounting for such incentives as tenant improvement allowances and initial months of free rent — was $103 a square foot, an unprecedented gap between the asking and the taking that has widened as the amount of concessions has become more generous. Rent minus the incentives was $128 a square foot for trophy space.

What’s more, Manhattan’s Class A asking rents overall hardly budged through the pandemic. They averaged $81 per square foot in 2019 and were $84 per foot through three quarters this year — and the annual figure in the interim never dipped below $81. Meanwhile, net effective rents moved further during the same period, from $60 in 2019 to $67 in the third quarter, according to JLL data.

This reflects the fact that higher-quality (and generally higher-priced) space has leased up more so than space that’s viewed as commodity — the market’s so-called flight-to-quality phenomenon. Asking rents reflect pricing of all spaces. Net effective rents reflect only space that’s managed to be successfully leased.

A dry spell of new office construction partly explains the stubborn asking rents, too. The lack of new supply coupled with continued high demand for the newest buildings has helped asking rents at the top of the market, balancing out declines elsewhere, Lim said.

That doesn’t mean brokerages aren’t advising some owners to reduce their asking rents to facilitate deals.

“There’s no blanket statement,” Lim said. “If you are a landlord on Park Avenue, you’re probably going to be advised to raise your rents, because there’s competition for your space. But if you [own] an older office building downtown or in certain pockets of Midtown, you may not have that demand. There is a reality that you have to confront at a certain point, you can’t let this office space sit vacant and not collect rent.”

You shouldn’t let a building’s value drop, either. 

“It definitely depends on what part of the market we’re talking about,” said Jessica Morin, director of U.S. office research at CBRE (CBRE), said of asking versus taking rents. “What we are seeing is that asking rents for the most part in the overall U.S. office market are pretty stable, with the demand for quality new construction, [which] has high rents, that’s bringing the overall average up.”

Landlords have incentives to maintain, or even to increase, their asking rents, which are important for their property values and can affect their underwriting, Morin said. That in turn helps them meet their financing requirements and ensures a building maintains its value. 

Should a building’s value drop, that might make it more difficult to get financing later on. And a deliberate writedown in value, one that might involve lowering asking rents, can lead to complications when the building trades. This is especially true in a New York City property tax system where value is not necessarily determined by the market, but rather by income and expense statements that owners submit annually. Again, asking rents play a role. 

It’s in commodity buildings — the Class B stock that offers few amenities and is often in locations seeing low demand — where the gap between asking and taking rents are the most pronounced, Morin added. There it’s building by building as to whether landlords should lower their rents.

Concessions such as tenant improvement allowances or free rent do help landlords maintain their advertised rents, Morin said. In prime buildings, landlords hold “the upper hand” in rent negotiations.

CBRE data supports the notion of a “tale of two cities” market, where rents soar for the topmost quality, while slipping for lesser spaces.

In the first half of 2024, the firm found that on a national basis, taking rents rose 2.4 percent for top-tier office properties, while falling 1.2 percent for the “lower tier.” A similar pattern occurred in recent years, with top-tier rents falling 1 percent in 2023 while falling 4.3 percent, more than four times as much, for the lower tier. In 2022, rents rose 2.4 percent in the top tier, while falling 2.1 percent in the lower tier, and in 2021 they rose 3.8 percent in the top tier while falling 3.4 percent in the lower tier.

In a passage that he worried would be “a little provocative,” Ben Brown, Brookfield’s managing partner for its U.S. real estate group, said at a Commercial Observer forum in November that the market no longer even thinks about net effective rents. Brookfield controls 424 properties and 179 million square feet in gateway cities across the globe.

Brown said the market “got to a place” where a low interest rate environment allowed landlords to “borrow very cheaply.” This allowed them to subsidize concessions, and reduced the pressure to max out rents. 

One possibility that exists is that some of that excess B-quality office space will be converted to housing. According to CBRE, 73 office conversions nationwide had been completed through mid-September, and another 30 would be delivered by year-end, the most since the company began tracking such conversions in 2016. As of this year’s third quarter, 71 million square feet, or 1.7 percent of the U.S. office inventory, was planned for or already undergoing conversion.

The downtown vacancy rate for multifamily residential was just 5.3 percent in the third quarter, compared with 19.6 percent for downtown offices. Multifamily rent had gone up 22 percent since 2020 versus just 1 percent for offices.