Manhattan’s Office Market in 2025: Strong Signs of Further Recovery

Times Square’s famous ball drop has marked the beginning of a new year — and the end of a relatively positive year for New York City’s office market.

Manhattan’s office leasing activity hit 33.3 million square feet by the end of 2024, with the 10.2 million square feet signed in the fourth quarter representing the strongest quarterly leasing volume in five years, according to data from Colliers (CIGI). That’s also slightly above the yearly office leasing average of 32 million square feet before the COVID-19 pandemic in 2020 upended commercial real estate.

In addition, Manhattan’s 16.5 percent availability rate during the fourth quarter was the lowest in more than two years, down from 17.3 percent at the end of the third quarter, according to Colliers.

And it seems 2025 will be a “continuation of that rebound,” said Bruce Mosler, chairman of global brokerage at Cushman & Wakefield (CWK), largely thanks to companies like Amazon, Starbucks, AT&T and Sweetgreen instituting strict return-to-office mandates for the new year and seeking out higher-quality office spaces.

“Demand is back, and there are no storm clouds on the horizon,” Michael Cohen, president of Colliers’ tri-state region, said. “If anything, there are the opposite of storm clouds, because we’ve seen the financial services industry kick in and we’ve seen growth from the traditional New York tenancy. There’s no reason to believe that the demand will not continue into 2025.”

The tenants leading the way in leasing in 2024 were in the tech, finance and legal sectors, mostly due to a surge in deals sparked by “pent-up demand,” along with new developments and reinvestments in assets, Mosler said.

Those same companies are expected to remain strong in leasing this year as tenants race to winkle out new, amenity-filled office buildings before they completely fill up, Mosler said.

And, while it seems Manhattan’s office leasing will see another relatively good year in 2025, it remains to be seen how factors such as office-to-residential conversions, maturing office debt and a new presidential administration will play out.

New York City has experienced a wave of office-to-residential conversions in the past year, driven mainly by high vacancy rates due to trends such as an ongoing shift toward remote work and technology facilitating a reduction in footprints (think the digitization of law libraries).

But the conversions have posed problems for those companies now suddenly pivoting to in-office work policies. Those companies include Amazon, which has been forced to give the yellow light on its mandate due to a lack of office space.

Even more office space could become unavailable as these conversions pile up. However, Peter Kolaczynski, associate director at data firm Yardi Matrix, said the demand shouldn’t be a problem — it’s not like tenants were flocking to those spaces anyway.

“I don’t think the [conversion] trend is going to be slowed down even with this office demand, because some of those buildings are functionally obsolete for offices and are not going to be attractive places for people to work,” Kolaczynski said.

In fact, since the beginning of 2021, almost 8 million square feet of Manhattan’s available office space has come off the market due to planned residential conversions of older, obsolete office buildings, according to Colliers.

And now that Mayor Eric Adams’s City of Yes for Housing Opportunity plan passed in December, even more office space may be taken up by conversions as the measure’s rezonings allow for more of these projects.

Residential conversions already underway include Bushburg’s conversion of the 1.2 million-square-foot office building at 80 Pine Street; Metro Loft Management and InterVest Capital Partners’ 1,350-unit project at 111 Wall Street; and several other Lower Manhattan conversions at buildings such as 25 Water Street, 160 Water Street and 90 John Street.

“I do think we will not see the quantity of residential that we need, or want, but I certainly think [conversions] will be very powerful downtown,” CBRE (CBRE) tri-state CEO Mary Ann Tighe said. “If you take a look at 2024, the positive absorption we’ve seen in the downtown market is because of conversions of office space. The older building stock downtown lends itself to that.”

Many experts also believe conversions will help the office market in 2025 as office tenants in underutilized buildings that are ripe for conversion get pushed into the market to find new space. However, some still have concerns about the cost and the complicated construction of such projects.

“In general, the cost to convert a commercial building to a residential building is significant,” Robert Gilman, partner and leader of the real estate group at accountancy Anchin, told Commercial Observer. “So I still don’t see a lot of conversions happening.”

More than half, or 51 percent, of the city’s office space is considered difficult to convert and poses significant limitations that make residential conversions challenging, according to Yardi. That may include the 1902-built Flatiron Building, which is set to be turned into 60 luxury condos.

But conversions aren’t the only concern about the city’s office market in the new year. Some buildings are financially shaky.

By the end of 2026, approximately $46.8 billion in office loans are set to mature in Manhattan alone, according to Yardi. Not to mention, landlords also face increasing costs and decreasing property values, making it harder for them to not hand back the keys to their buildings to their lenders.

Plus, 2024’s loan maturities represented 20 percent of outstanding commercial real estate debt, according to Scott Aiese, senior managing director at JLL. Now it’s time for banks to work with landlords to either extend loans or replace old capital — but Aiese said the go-to cliche may be expiring for owners who have struggled the longest.

“I think, at some point, something has to give where the option to ‘extend and pretend’ may not be there anymore, and there might be some keys given back,” Gilman said, agreeing with Aiese.

This year’s looming maturing office debt follows the industry’s cautious optimism in the beginning of 2024.

About $1.15 billion of commercial mortgage-backed securities (CMBS) office debt reached its fully extended maturity date in January and February of 2024, with payoff rates reaching nearly 50 percent, as CO previously reported. That was compared to a CMBS office payoff rate of 35 percent in 2023.

Some experts hope the trend will continue into 2025, when landlords are seemingly facing a “year of reckoning.” 

“I actually think it’s going to be a good thing for the market, because the proverbial ‘extend and pretend’ will be over,” Tighe said. “What will happen is either the current owner brings in new equity to the situation, or the lender takes the building and finds a new owner with a new basis in the building.

“I think it’s probably 30 years overdue, because buildings that have been at the bottom of the market for a long time, they just are a drag on the supply,” Tighe added.

Peter Riguardi, chairman and president of JLL’s New York region, agreed, saying the landlords that “get that capital in the middle market and reposition their assets” in 2025 and 2026 will get “the highest rental achievements for those assets.”

While New York City’s CRE industry waits to see whether landlords will be able to pay off maturing loans in 2025, it will also be watching how things change under a new administration in the White House.

President-elect Donald Trump may bring a “return to normalcy” for the real estate market, Riguardi said, due to moves like bringing federal government staff back into the office five days a week, pushing for more conversions, and pulling back on regulations.

Many leaders in CRE are also hoping Trump’s nearing administration will be a positive for New York City’s industrial market, as the former president’s rhetoric about boosting manufacturing in the U.S. may lead to a boost in demand for spaces such as logistics hubs, warehouses and manufacturing facilities. That could in turn take some office space off the market as it’s converted to such uses, especially warehouses. 

Just like the Trump administration’s incoming policies, the fate of Manhattan’s office market in 2025 is not yet clear.

Still, it seems the consensus in the industry is that it will be another successful year for office leasing versus the early pandemic years as return-to-office mandates accumulate and post-COVID burdens lift slightly from landlords’ shoulders.

“I think the future is bright,” Mosler said.

Isabelle Durso can be reached at idurso@commercialobserver.com.