Manhattan's Office Market Picking Up Speed With Activity At Pandemic-Era Highs
Manhattan’s office market ended the year with its best quarter since 2019, but a steady stream of new inventory means a return to any semblance of pre-pandemic normalcy may still be far in the future.
The fourth quarter saw office leasing activity across Manhattan increase to levels not seen since before the pandemic, according to a Colliers report released this week.
Firms leased 8.6M SF in Q4, up 19.3% from Q3 and double the total lease volume seen in the last three quarters of 2020. Total office leases during 2021 surpassed 25M SF — the largest year-over-year increase since 2013 at 31.6%.
Still, the full picture painted by Colliers — and echoed in other quarterly reports by Newmark and Savills — shows a Manhattan office market facing headwinds to a full recovery. Leasing volume for 2021 is still less than 50% of 2019 totals. In addition, a flood of new inventory that is expected to continue into the coming years has meant negative absorption and unprecedented vacancies.
“We are still in this period where the increasing demand is not enough to offset the increasing supply,” said Frank Wallach, Colliers’ senior managing director of Research. “Until that happens, it’s really going to hamper the recovery.”
A pre-pandemic wave of large office projects with deliveries scheduled throughout 2021 and 2022 set the stage for this imbalance in supply and demand, Wallach said. Indeed, since March 2020, available office space has grown an astounding 72.2% to 92.7M SF, with 40M SF added to the market during that time period. Accordingly, office availability in Manhattan increased in the fourth quarter to a record 17.3%, with the market’s net absorption at negative 2.3M SF.
Wallach says that even with the fourth-quarter surge in demand, he doesn’t expect the market to return to equilibrium anytime soon.
“It would take a momentous amount of leasing activity, even in a non-pandemic period, to offset the vast amount of supply that we had scheduled to come on the market over the last several years and will continue to have scheduled to come on the market over the next several quarters,” Wallach said. “Demand is certainly moving in the right direction, we just haven't fully arrived there yet, and until we do, we're still going to be seeing negative absorption and increasing availability.”
Manhattan’s fourth-quarter surge in office demand was most pronounced in Midtown, which saw its leasing volume grow more than 56% from the previous quarter. The area’s 5M SF of new leasing activity was driven by nine separate leases of over 100K SF, two of which exceeded 250K SF. Most notably, NBCUniversal Media extended its 340K SF lease at 1221 Sixth Ave., while ViacomCBS signed a new, 284K SF lease at 51 West 52nd St.
Across Manhattan, asking rents increased by more than 3% from the previous quarter to $75 per SF, according to Colliers. But the report cautions that this figure, although echoed by both Newmark and Savills, is distorted by the significant volume of new premium office properties coming on the market in the last three months.
The influx of new Class-A office space coincides with a general flight to quality. Of the 13 leases in Manhattan of over 100K SF during the fourth quarter, 11 were in Class-A properties, according to Colliers. At the same time, Wallach emphasizes that this trend toward Class-A properties is not just being felt at the top of the market.
“The sub-25K SF deals have always been the bread and butter of the market, and in every size range we've seen some cases of flight to quality," Wallach said.
As to whether this momentum can continue in spite of the emergent omicron variant, Colliers, Newmark and Savills are reluctant to speculate. But Wallach remains bullish; he said he’s not aware of any deals that were scrapped due to the omicron surge.
“People forget that Manhattan often operates in cycles, that it is a 400-year-old office market, and that there have been centuries of challenges in that market — natural political, terror-related, economic, what have you,” Wallach said. “I think this year's uptick in leasing activity, even though it was not enough to offset supply, it demonstrated that, long term, the office market will recover.”