Midtown’s Class A Office Drought Ups the Stakes Even More

When SL Green (SLG), a real estate investment trust with significant Midtown Manhattan exposure, announced a new $250 million capital program for its 245 Park Avenue property in the fall of 2024 — including heavily amenitizing the space and renovating the outdoor plaza to improve the tower’s curb appeal — the payoff was immediate. 

“We were able to lease it up before we meaningfully started physical construction,” said Steven Durels, SL Green’s director of leasing and real property. “There’s just an insatiable, insatiable demand for high-quality Park Avenue product.”

SL Green’s experience with 245 Park mirrors that of many owners of neighboring properties who have seen potential tenants knock down their doors rather than simply knock. Midtown Manhattan’s whiplash-inducing turnaround — from a zombie district during the height of COVID to an in-demand submarket desperate for Class A real estate — has created a squeeze for trophy offices that will shape the market for years to come. 

And there’s little relief in sight. Only a handful of new office towers are on the horizon, with much of the space in those already taken. 

Year-over-year data suggests, too, that demand for limited amounts of high-end space, like One Vanderbilt or Hudson Yards, has spiked rents, making Midtown Manhattan one of the world’s most valuable office markets. CompStak found that the average effective rent for new or renovated Midtown Class A office leapt from $92 to $117 per square foot between 2023 and 2024, while rents for older A, or even B and C space, stayed relatively flat. 

The share of new Class A and trophy leases signed last year in Midtown for $100 or more a square foot represented 31 percent of total transactions, per CompStak. That’s double the numbers from 2023, where that threshold made up only 15 percent of the market, and even more than in pre-pandemic 2019, when it represented 27 percent of the market. Leases at Hudson Yards, which saw rents grow by a third in the last five years, have topped $150 a square foot.

The benefit of this shift back to Midtown convenience has been a broadening of the market, said Durels. The submarket isn’t strictly as dependent on a single type of tenant like tech, finance or law. Midtown boasts all three, and has diversified over time, adding health care and education as well. 

And, in a post-pandemic world, the neighborhood’s commuter convenience is a premium amenity, pushing big firms to seek trophy space near Midtown transit hubs. That has spurred big reinvestments in office districts, starting with Park Avenue and spilling over to Sixth Avenue, Rockefeller Center and the Plaza District. It’s also pushing up potential sales prices: 590 Madison Avenue, a 41-story tower near Central Park, may fetch a price of at least $1 billion, a feat not seen in Manhattan in more than two years. 

That demand, and the dearth of new office space expected to come online over the next few years, means Midtown tenants, and potential tenants, should be thinking years ahead if they want to find a home in this increasingly constrained market, said JLL (JLL) Vice Chairman Daniel Posy. 

The only sizable Class A buildings in the pipeline are J.P. Morgan’s new headquarters at 270 Park Avenue, which the bank has dibs on; Extell’s 29-story 570 Fifth Avenue, which recently started construction and is due to include an Ikea store amid its office space; and RXR and TF Cornerstone’s early-stages bid to build a supertall at 175 Park Avenue in anticipation of demand. Taken together, these will not be enough to satiate firms shopping for new space. The pressure to renew, and raise rents, will be strong, with law and finance firms likely looking to pay for long-term leases. Fintech firm iCapital signed a long-term renewal at One Grand Central Plaza last month, while law firm Mayer Brown just inked a renewal at 1221 Avenue of the Americas in February for 331,00 square feet, a big expansion.

“The fact that there’s so little new construction coming, and what is still under construction is already leased, is definitely of concern to the market,” said Alison Baumann, CompStak’s senior director of real estate intelligence. 

Roughly 20 percent of Midtown’s currently active leased office square footage will expire between mid-2025 and the end of 2027, per CompStak data, and 75 percent of that soon-to-expire space is in Class A buildings. This potential reshuffling includes Paramount Global (1.6 million square feet at 1515 Broadway), Bank of America (nearly half a million square feet at 114 West 47th), Lazard (323,000 square feet at 30 Rock) and J. Walter Thompson (270,000 square feet at 237 Park). 

“As advisers, we need to be extremely proactive in telling our tenants, ‘Your lease is up in five years, let’s think about it now,’ ” Posy said. “Proactive tenants are going to be more prudent and be able to pounce at the right time. The other ones who are just not thinking about it are going to get lost.”

Shifts in transactions over the last few years have underscored the increasing shortage of high-end space at the top of Midtown’s market. Since 2018, the size of renewals and extensions has increased 156 percent, from roughly 27,000 to 34,000 square feet, with those already in Midtown clinging to existing space or seeking to grab whatever becomes available. 

It’s pushing some clients into a wait-and-see posture — Posy said he’s working with a pair of tenants that have resigned themselves to wait years for the next opening in the submarket — or steering them toward non-trophy space, creating a tide-that-lifts-all-boats situation for Midtown landlords. 

The roughly 25 million square feet of Midtown space SL Green’s Durels estimates will come offline because of office-to-residential conversions will push tenants to these offices from the other direction as well. Owners will still have to amenitize to compete against other, similarly rated mid-tier properties in Midtown, but the rewards seem guaranteed in this environment.

“If you as a tenant don’t want to spend, you know, $150 or $200, or even $100 a foot, you’re going to start having to go to the ancillary buildings,” said Posy. “That’s pushing their prices up. That’s appreciating the prices of the A-minus and B-plus buildings, which are seeing leasing velocity for the first time in three years.”

This demand for trophy space in Midtown needs a release valve. Part of the solution may be Midtown South, which Posy said has been “reaping the attention” of tenants and brokers. He points to IBM’s expansion at One Madison and leasing momentum at 360 Park South. BXP bought that tower for $300 million and then sunk $100 million more into repositioning the property, attracting tenants such as publisher Ziff Davis. 

Midtown South is also in the midst of a rezoning called the Midtown South Mixed-Use Plan, which may wrap by the end of 2025. The plan calls for expanded opportunities for both office-to-residential conversions — again, curtailing the supply and making remaining offices more valuable — and regulatory shifts that could make new office development more feasible. 

The rezoning would offer a floor area ratio, too, that would make it much more feasible to renovate outdated Class C offices — or demolish and rebuild without losing significant square footage. And, looking very far ahead, state-run redevelopment of sites at the Port Authority Bus Terminal and Penn Station offer the opportunity to add significant office space above two key transit nodes.  

“Part of the intention here [with rezoning] is to allow and incentivize the highest, best use, which is not necessarily what’s there now,” said Daniel Bernstein, a land-use attorney at Rosenberg & Estis. “Can there be a new office, which might be the Class A office that’s in demand?”

The robustness of Midtown continues to change developers’ plans. Posy points to office-to-resi conversions around Times Square suddenly taking a breather, wondering if renewed office demand means it’s worth testing the waters to see if these older buildings have contemporary appeal. He envisions larger tenants cobbling together campuses if they can’t get contiguous space. If you’re on Park Avenue, for example, you might take additional space on Lexington. 

And new builds suddenly seem like part of the conversation, despite the extensive time frame and the currently higher costs of financing a project. Durels estimates a multiyear process for redevelopment of existing space, and five to six years for ground-up projects.

“I think a lot of landlords are very strongly considering putting up buildings on spec, and their lenders are now allowing them to do that,” said Posy. “That just shows you the turn of the market.” 

SL Green, which became bullish on Midtown in the current cycle before many others, closed on an acquisition of 500 Park Avenue earlier this year, and has publicly expressed interest in another  large-scale Midtown development site (that has yet to be identified). Durels sees no change in direction to the current upswing. 

“Even though it’s a five- to six-year process, we have confidence in this marketplace, and we want to focus on the top end of the market,” said Durels. “We don’t see new supply coming in anytime soon. Now’s the time to be in the real estate business.”