Manhattan Office Leases Are Getting Smaller and Shorter

On the surface, Manhattan’s office sector is a rosy picture of health entering the second half of 2025.

Midyear reports indicate that leasing in the first half was the strongest it’s been since 2014, with 20.63 million square feet of office space leased in Manhattan, up 42.2 percent from the first half of 2024.

And, according to Savills, the celebrations have trickled down from Class A properties to also include Class B and C spaces, with leasing in the latter classes accounting for 44.8 percent of Manhattan’s first-half total, up from 35 percent over the previous four quarters.

Yay for us.

Yet, lurking under the celebratory numbers are potentially troubling signs for the future in terms of both demand and supply. While more deals are being done, many companies are taking smaller amounts of space, seeking shorter terms and demanding greater flexibility — all signs that the bullish economy and jobs picture still might call for a sense of caution.

Colliers notes that the number of smaller lease deals in New York in the first quarter of 2025 increased markedly from previous years. 

Between 2022 and 2024, the highest annual number of office lease deals in the 5,000- to 14,999-square-foot range was the 954 deals executed in 2024. The first quarter of this year saw 303 deals in that size range, putting the city on pace for over 1,200 smaller deals.

And, while 40 percent of all leasing demand was for spaces over 100,000 square feet if measured by leasing volume, the actual number of deals for that amount of space constituted just 4 percent of all lease deals in the first quarter. Sixty-seven percent of all office deals were for spaces in that 5,000- to 14,999-square-foot range.

All of this shows that while deals for large, luxurious Class A offices with a yacht-load of amenities may attract the most attention, market activity is, in a sense, growing smaller.

And why shouldn’t it when so much about the economy and the future of work are in question?

Given recent uncertainty about the economy due to factors that include tariffs, general geopolitical turmoil and shifting alliances in global trade — as well as the coming loss of jobs due to AI and the growing number of brand-new, future-uncertain companies established to capitalize on the same — how many companies outside of the larger, more familiar institutional names can feel certain that they’ll need the same amount of office space in four or five years? Much less 10 or 15?

Bernadette Brennan is an executive director at SERHANT, where she deals heavily in the leasing of Class B and C office space in New York. Brennan is seeing corporate space demands begin to shrink.

“Bigger companies, even the bigger tech companies, are now saying, ‘Our leases are coming up in the next year, and we are going to be taking a smaller footprint,’ ” said Brennan, who believes that part of this derives from an increase in tasks formerly handled by humans but now farmed out to artificial intelligence.

“One of the Fortune 500 companies was looking for an entire building. They wanted 50,000 square feet or more. They have now revisited that into a much smaller footprint,” said Brennan. “They’re now looking at something around 25,000 or 30,000 square feet, saying, ‘We don’t need that extra 20,000 square feet. We’re no longer going to need that footprint for people coming into the workplace, because it’s all being outsourced now.’ ”

Evan Margolin, vice chairman of tenant representation at JLL, is seeing much the same.

“I’ve been talking to people who deal with Class B and C, and people are saying, ‘Because of AI, we’re outsourcing a lot more and hiring a lot less. So our space needs are shrinking,’” said Margolin. “When they look a few years down the line — because when you’re talking about a lease, you have to think ahead — they can’t see needing the space they need now five years from now.” 

Bob Knakal, founder of investment sales firm BKREA and creator of the famous Knakal Map Room, expands on the point about outsourcing to take it past AI and deeper into reasons for a growing desire for smaller spaces.

“I have graphics people in the Philippines that do just as effective a job as people who used to work for me in-house. I have an analyst in Colombia, and I pay them a fraction of what I paid my analyst at my old company. We’re talking about going from $150,000, plus bonus, to about $25,000 a year for the same level of expertise. So a change is happening,” said Knakal. “When we sold my old company, Massey Knakal, in 2014, we had about 60,000 or 70,000 square feet of office space. Today, there would be functionalities I would definitely not rent $40 or $50 a foot of office space for. I’d have a smaller space today, without a doubt.”

The June jobs report, in which the U.S. Department of Labor announced the addition of 147,000 new jobs, could be seen as a sign that the need for smaller office spaces might not be as pressing as all that. But Sam Chandan, founding director of the Chen Institute for Global Real Estate Finance at New York University’s Stern School of Business, points out that the majority of these employment gains are highly concentrated in just a few specific niches.

“The job gains we’re seeing are a little imbalanced,” said Chandan. “They’re in state and local government, leisure and hospitality, and health care, with a little bit in construction as well. We’re not seeing job gains in areas like professional services.”

Chandan believes that the true nature of changing employment dynamics and their impact on office demands are likely not being properly considered by office building owners.

“Are landlords properly anticipating how AI and innovation could change the structure of the workforce and what our office space needs are? I’d be comfortable saying, ‘Probably not,’ ” said Chandan.

“Change is constant, but the pace of change is clearly accelerating toward maintaining flexibility in layouts and design so that space can be redeployed. The likelihood of needing to think about a different deployment of your space is higher today than it has been in the past, and that’s only going to become more true as we go forward.” 

And, while demand for smaller spaces is rising, the need for greater flexibility expands to include shorter lease terms as well.

Ethan Silverstein, an executive vice chairman at Cushman & Wakefield, notes that outside of the trophy class, office tenants are seeking flexibility in growing numbers.

“I think most tenants, unless they’re of substantial size, would probably prefer to sign shorter-term leases compared to the historical norm,” said Silverstein. He said spaces 100,000 square feet and higher are still commanding 15- to 20-year commitments, but, for anything smaller, freedom to shift is key — and that applies to most of the office tenants in New York City.

“The average-size tenant in New York City is about 8,000 square feet,” said Silverstein. “If I’m going with the 8,000-square-foot tenant, they absolutely want more term flexibility. If they were forced into a lease and had to pick a shorter term or longer term, most of those tenants would be more desirous of a shorter term.”

Part of this is driven by the rapidly rising number of new tech companies, most of which seek to capitalize on AI and other ongoing advancements in technology.

The nonprofit Center for an Urban Future noted in an April 2025 report that New York City was “home to 8,750 funded tech start-ups, more than double the figure (3,772) from a decade ago, according to CUF’s analysis of data from Crunchbase.”

In the quest for office space, the desired lease terms for companies like these must account for uncertain futures.

“I am working with several clients right now in the 1,500- to 3,000-square-foot space,” said Jarod Stern, executive managing director at Savills. “They have funding. They have investors. And they don’t know what their future looks like because they’re in their infancy. They require shorter or more flexible lease terms because they don’t know what they’re going to look like in six, 12 or 18 months.” 

The ultimate term difference for companies like this is notable. For the first half of 2025, the average lease term for
financial services companies, considering both direct and sublease deals, was 7.6 years, according to JLL. That term shrinks to 5.3 years for tech firms in general, and to just 3.5 years for AI firms.

“Smaller tenants — say, under 10,000 feet — prefer optionality, and will typically prefer to do five years or maybe even less, if that’s available,” said Margolin. “That’s because the needs of smaller tenants are more dynamic. They know they’re not going to be static at 5,000 feet. They’re either going to grow, go out of business, or get absorbed. So they don’t want to be saddled with a long-term lease obligation.”

Given the condition of many buildings in the commodity classes, owners often have little choice but to accommodate the terms a potential tenant desires.

“If you’re representing a tenant in a commoditized Class B or C building, those buildings don’t have a lot of demand, so the tenant can dictate the terms,” said Margolin. “If it’s a mid-block building in a nondescript neighborhood where no one building is better than the next, you will always find a landlord willing to do a shorter duration lease or a cheaper deal.”

The situation has become so commonplace that many landlords have come to accept their less beneficial position.

“The industry standard used to be a minimum five-year commercial lease, for the most part. Most landlords would bark at three,” said Brennan. “Now, three looks great to them. We have listings at 589 11th Avenue and 281 Park Avenue South, and given the amount of inbound on those listings for pop-ups and short-term rentals, that kind of stuff has shifted immensely.” 

Meanwhile, as Class A and trophy offices have been on the upswing, there are occupiers in those categories taking on smaller spaces for the opposite reason as their Class B and C counterparts: a deepening dearth of supply.

“There are no new developments happening whatsoever,” said Danny Mangru, U.S. office lead for market intelligence at Avison Young. “We’ve got under 2 million square feet of development in Manhattan that’s going to be delivered in the next couple years.”

Class A’s deal volume growth has been helped along by a slew of megadeals in the first half of the year, with 21 lease deals over 100,000 square feet — the most since 2019, according to Avison Young. This, together with shrinking top-of-the-market development, is leading some tenants in that category toward smaller-
than-desired spaces as well.

“This year, we are seeing smaller deals,” said Andrew Lim, director of New York research for JLL. “What’s changed is the kind of availability in the market right now, more within Class A than B and C. In the last four quarters, there have been very few large blocks of space in Class A buildings in higher-demand areas like Midtown or by the World Trade Center. So what we’ve seen is a lot of smaller leases being signed in buildings close to where these companies are.”

This trend is growing nationwide. Despite an overall sense of momentum for the office sector, the average U.S. office lease size has declined every year since 2019, according to Avison Young. Driven entirely by new leases, 2019’s average lease was 32,870 square feet. By 2025, that figure compressed to 27,932 square feet.

The result of all of this is showing strong potential to become a substantial, long-term reorientation of what “normal” means in regard to average lease sizes for office properties in New York and around the country.

Mangru refers to the downward slide of lease size among Class B and C as “the flight to efficiency,” and he believes it’s part of a reorientation toward a new normal.

“More occupiers in that B class are moving into more efficient spaces,” said Mangru. “I think you’ll continue to see the lease size drop in the near term, and over the long term [those new, smaller footprints] will probably be normalized. I would imagine that maybe over the next 24 to 36 months we’ll have a new norm when it comes to the average lease size.”

Larry Getlen can be reached at lgetlen@commercialobserver.com.