Tens of Millions of Square Feet of Manhattan Office Leases Expiring

The Manhattan office market isn’t quite done living through the post-pandemic period. There are still nearly 55 million square feet of lease expirations to get through in the next 36 months.

The figure, the total amount of leasing set to expire between now and the end of 2027, per the brokerage JLL (JLL), is not particularly unusual for the 410 million-square-foot Manhattan market, America’s largest, brokers say. What’s different this time is whether the penchant for working from home or from some remote location — or whether some technological advancements, including artificial intelligence — will prompt companies to reduce or “rightsize” their footprints.

The 36-month figure breaks down to 31.8 million square feet in Midtown, 12.1 million in Midtown South and 11 million square feet in Lower Manhattan. Reportedly, a number of tenants holding these leases are already exploring their options in the market.

“We are now entering a Darwinian period, the likes of which we’ve never seen,” said Ruth Colp-Haber, president and CEO of Wharton Property Advisors, a boutique firm that specializes in tenant representation. “The weaker buildings are going to bear the brunt of these upcoming lease expirations. You have three major problems: No. 1, the mortgages on their buildings are coming due; No. 2, the leases in the building expiring; and, No. 3, the huge cost of construction.”’

According to brokerage CBRE (CBRE), there are 14.9 million square feet expiring in 2025, 16 million in 2026, and 15.9 million in 2027 in Manhattan — excluding “moving tenants” — for a combined total of 46.4 million square feet. Also per CBRE, about 12.5 million square feet was leased in 2020, 20.4 million in 2021, 23.2 million in 2022, 18.9 million in 2023, and 16.5 million square feet through the first three quarters of this year.

“Moving tenants” are those known to be returning space to the market — for example, when they move to another building — said Michael Slattery, CBRE research manager.

There are reasons, then, to think the market might be momentum-challenged. For one thing, according to a recent report by brokerage Avison Young, lease expansions this year through the third quarter accounted for only 8.8 percent of total transaction activity, a number comparable to the pandemic-tainted 7 percent in 2020. What that means, according to Danny Mangru, Avison Young’s U.S. office lead for market intelligence and author of the report, are cases where a tenant is growing its footprint in a building where it has been a long time. 

Some brokers don’t see the high number of looming expirations as a major problem. They see an office market that is breaking out of its post-pandemic doldrums, with more companies willing to go to bat for the belief that employees do their best work when together in the office — and whose leaders are willing to enforce policies that say so. The most significant recent example might be Amazon, where top executives in September demanded that workers be in the office five days a week starting next year.

According to management consultancy KPMG’s “2024 CEO Outlook,” chief executives are hardening their stance on returning to pre-pandemic office attendance. Per the report, 83 percent of those surveyed said they expect a full return to work within three years, up from 64 percent who thought so last year.

“The data would suggest that people are back, people are coming back, and, whether that’s three as opposed to four days a week, they’re coming back,” said Joe Messina, a vice chairman in JLL’s New York office. 

To encourage the trend, many companies are enhancing their offices to make them welcoming and attractive. “Even if there is some level of hybrid work, they’re adding amenities to the space,” Messina said. “Generally, the envelopes are the same, but they’re building out differently, and there are more collaborative spaces to encourage people back in.”

Adding amenities requires more room, and recent leasing activity in Manhattan does suggest a growing scramble for space. Some 3.9 million square feet of office space was leased in October, roughly 46 percent above the 10-year average monthly leasing rate of 2.67 million feet, according to Colliers. 

“The market has really come alive this year, in terms of office leasing,” said Joseph Gervino, a principal in Avison Young’s New York office. “There’s a lot of activity in that 100,000-square-foot-plus range. It’s a very active market, on both the tenant and landlord side.”

But Gervino spoke of “a tale of two cities,” where the firms that can fly to quality fill up the Class A spaces in places like One Vanderbilt, Hudson Yards and the Sixth Avenue corridor near Rockefeller Center. Meanwhile, markets that have more commodity or Class B space, such as Third Avenue or the Garment District, bear the brunt of the exodus.

“If you’re a landlord and you represent Class A, A-plus, trophy space, that’s a tight market,” Gervino said. “There isn’t a ton of availability out there. The type of asset that has really been struggling has been that Class B and Class C.”

Gervino suggested that, with demand rising, the hunt for space would soon spread to Manhattan’s less chic areas, though just about every tenant is looking to improve its physical setting. What was happening, he said, was that many tenants re-upped for short terms in recent years, pushing their expirations out to 2025 or 2026 in the hope that the office market would be healthier in terms of deals. That has proven to be the case, Gervino said.

“It’s physical,” he said. “You can go out and the street’s more crowded.”

Tenants in recent years “didn’t have a firm grasp” on their return-to-work policies, he explained. Pushing out leases bought them time to get a firmer handle on who was coming in and when, he said. 

Vacancy levels in Manhattan’s trophy office buildings were 8.4 percent in the third quarter, according to JLL. In Hudson Yards, the vacancy rate was 7 percent, and along the posh Park Avenue corridor from Grand Central Terminal to 60th Street it was 6.4 percent. Near Bryant Park, it was only 1 percent. Overall, Manhattan’s office availability rate — a measure of space vacant or soon to be vacant — was 18.7 percent in the third quarter of 2024, according to a report by Avison Young.

It’s good that so many commercial landlords pushed and were willing to pay for better amenities, Gervino said. He described a media tenant client who wouldn’t even look in the rising Bryant Park area unless the building had a flex office provider and a conference center.

“Tenants don’t need these massive, massive boardrooms,” Gervino said. “If they can have a [coworking and shared-area operator] Convene in the building, where the building provides it — like, 200 Park did a great job with their conferencing center. 245 Park is doing it now.”

Another leading brokerage, Savills, is sort of in the middle on the lease expiration debate. Savills reported 41.4 million square feet expiring in the next three years — and a challenging 18.4 million square feet in 2028. It sees a reckoning coming for buildings that are neither top-of-the-market Class A real estate nor candidates for conversion to residential, said Nicholas Farmakis, a Savills vice chairman.

“2022, 2023 were, generally, at average, and I think `24 will surpass the average for the past 10 years,” Farmakis said of leasing. “Having said that, in order for a space to lease, from the landlord’s perspective, it really can’t be just a commodity building. We’ve all talked to death about a flight to quality, but what that really means is that if office space is no longer a commodity use, then a lot of the activity we’ve seen has been directed toward the better buildings.”

Wharton’s Colp-Haber estimated that 15 to 20 percent of New York’s commercial buildings “are doing great.” While residential conversions are important, only a small percentage of buildings are properly configured to make it cost-effective to convert, she said. She estimated that 60 to 70 percent of tenants with leases expiring will likely move, leaving landlords to figure out how to refill those spaces.

According to data from CBRE, 19 office buildings in Manhattan have been converted to residential since 2016, taking just over 6 million square feet out of the office inventory. Four more conversions are underway right now, which will take out another 2.5 million square feet. Another 13 have been planned or announced, which would take out another 5 million square feet.

“Real estate moves in 10-year cycles,” said Colp-Haber. “This started in 2020, at the beginning of the pandemic. So we’re not even halfway through.”