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'The Fog Of War Is Lifting': More Companies Making Long-Term Decisions About Their Offices

This week’s announcement of the biggest office deal of the year was welcome news for New York City’s office market, which has been battered by high availability and low occupancy.

Leases like KPMG's 15-year commitment in Manhattan West — the search for which kicked off in 2018, the company said — are a sign more large corporations are finally making decisions about how they want their offices to look long-term, and what it means for the size of their spaces, industry insiders told Bisnow this week.

A rendering of Two Manhattan West, a 1.9M SF office tower Brookfield is developing on Manhattan's Far West Side.

“I do think the fog of war is lifting a little bit for most tenants,” Savills Vice Chairman Nick Farmakis said. “I think they’ve come to the conclusion of what they want to be, and I think that maybe the activity in the market is reflective of the fact that tenants have firmer direction than they really have at any time over the past couple of years.”

Tenants signing direct new leases and relocations in Manhattan have signed for an average of 9.9 years so far in 2022, according to Savills research provided to Bisnow. That is up from the average of 8.1 years in 2021.

Since July 1, there have been 12 deals of more than 100K SF signed in Manhattan, per Savills. In all of the second quarter, there were 11 such deals.

“July was slow, but August has been busy,” Current Real Estate Advisors Senior Managing Director Rob Kluge said. “I think landlords feel like things could get worse before they get better — not a guarantee, but a possibility — and they're saying, ‘OK, let's lock in tenants right now, let's be aggressive, let's give them lower rents or better concessions and just lock them up because who knows what the next six months will hold?'”

Brokers said this fresh activity is welcome, but most are accepting the market is fundamentally altered since the pandemic pushed most of the working population into remote work.

KPMG announced this week it is consolidating its office space by roughly 40% from three older buildings in Midtown into a 450K SF new headquarters at Brookfield’s Two Manhattan West

The day after the KPMG announcement, Silverstein Properties signed Freshfields Bruckhaus Deringer to 180K SF at 3 World Trade Center, another 15-year deal. In the largest Downtown lease of the year so far, according to Savills, the law firm is relocating and expanding from the 110K SF it occupies at 601 Lexington Ave.

Just under 6M SF was leased in Manhattan during the second quarter, a 5% jump from the first three months of the year, according to CBRE data. But the recovery is not yet complete. Leasing in the borough was still 4% down from the five-year quarterly average, per the brokerage.

“The first half of the year, we actually had more deals than compared to 2019. A lot of those deals are smaller deals and one-year renewals," JLL Vice President Lauren Calandriello said.

“It’s definitely still a tenants' market, but actually in the Class-A and trophy buildings in that flight to quality that you keep hearing about, their rents are actually rising. The commodity space is where landlords are a little bit more flexible on rents and we're continuing to see concessions be high with free rent.”

3 World Trade Center, developed by Silverstein Properties

While the past month has been more active for big deals, Lindsay Ornstein, the co-founder of OPEN Impact Real Estate, said her impression is a quiet market — with most of the deals happening with huge corporate relocations and nonprofits.

“The rest of the market is pretty quiet,” she said. “I think we were starting to come back and people were really planning and then when omicron hit, we got wiped out again. The reset button got hit, and everyone had to start over again, and were thinking, ‘So maybe we're not ready? Maybe this is going to keep happening?’”

GFP Real Estate Chairman Jeffrey Gural, whose company owns 12M SF of commercial real estate in the city, said the uncertainty that has plagued the market is far from abating as economic fears start to outweigh health concerns.

“A lot of tenants have pushed the pause button in the last few months, and they're waiting to see exactly how remote work is going to affect their business and their space needs,” he said.

GFP's portfolio is less exposed to large space reductions as it rents to smaller companies that often take leases of 2K to 3K SF, Gural said. He said when he speaks to the leaders of those businesses, they are still debating whether they mandate returns, switch to hybrid or allow their employees to set their own requirements.

“People seem to think they can work from home five days a week. That's a problem," Gural said. "I don't think that’s good for business, or good for the employees. They may think it is, but I think in the long run, people will realize that doesn't work.”

But across the board, firms are starting to formalize their workplace plans and for many that involves some form of remote work. KPMG's space reduction was announced alongside the company's plans to implement a hybrid schedule.

It is certainly not the first company to dramatically shrink space in a move — firms have slowly been compressing their office space for decades now. Since the 1980s, the amount of space employers have been planning for their employees has gone down by half, according to Moody’s Analytics

“If I were a landlord I would be nervous about that. The things we hear from our tenants is that there is drastic change in how the office is used and pre- and post-Covid,” said Kluge, an office broker with Current Real Estate. “Office is still a very important part of any business, there will still be demand for office space. But I do believe that the way it's going to be used will not ever go back to the five days a week, everybody in their seats — and with that strategy change, you can reduce your footprint.”

While the Big Four firm going from roughly 800K SF across three buildings built decades ago to 450K SF in a building still under construction is a clear demonstration that office requirements have been irrevocably altered by the shift to remote work, it isn't necessarily a "gut check" moment on the state of leasing, Savills' Farmakis said.

There is no need for a company like that to have all its employees in the New York office, he said, and it is a natural continuation of what’s been going on for years in the corporate world — though he said the pandemic accelerated that decision. The bigger fundamental affecting the market in the city is the push to high-quality space.

“It’s overall choppy. Fundamentally, supply will remain high, problematic buildings will continue to sit vacant,” he said. “High-quality space will lease, and it’ll be a muddy market for the next six months — at least — depending on what happens with the economy.”