Leasing's Down, Availability Rates Are Up And Office Owners Are Growing Desperate

As Manhattan leasing activity remains sporadic, landlords are going to extreme lengths on their retention efforts, according to reports from Savills Studley and Colliers International.

Overall Manhattan leasing activity fell slightly from 8M SF to 7.6M SF last quarter, putting leasing on pace to hit 30M SF by year’s end. Although this is a better result than 2015’s 28.1M SF, it’s a step down from 2013 and 2014. 

October was slightly better than September—highlighted by big leases by Major League Baseball and the NBA—but leasing’s still down one-third year-over-year, Colliers reports. 

As such, availability rates have risen. Midtown, for example, saw its Class-A availability rate jump to its highest point in years, and it continued to rise over the course of October. Despite this, Midtown asking rents remained flat (and even rose in October), and Midtown had nine of the quarter’s top 10 leases.

Desperate to keep their existing tenants, owners have begun adjusting lease terms, lowering asking rents, raising renewal concessions, increasing build-out packages, going all out with their build-outs with high-end glass and wood (despite the sharp increase in costs), and using swing spaces to keep important tenants in building as renewed spaces are built. 

REITs and short-term asset holders were the first to adopt these tactics, Savills Studley writes, but longer-term asset holders have also begun to do so. The firm notes that the cost of replacing a tenant is high, and many landlords face the risk of an extended lease-up period.

Short-terms leases could continue to increase as businesses grow cautious over (rather ironically) the office market’s strong conditions. Although rents are expected to decrease in the next year or two, Savills Studley doesn’t expect a 2008, post-Lehman-type crash.