Manhattan's Office Market Starts 2018 With A Slump
Manhattan office leasing activity slowed and availability began to increase in the first three months of 2018 as the impact of new construction and major tenant moves started being felt across the market.
Overall, Manhattan’s first-quarter leasing activity fell almost 17% from the same time last year, which is beneath the average for the last five years, according to Colliers International’s quarterly report. According to Newmark Knight Frank’s quarterly analysis, there was 8.4M SF of office space leased across Manhattan in the first three months of the year, which is 7.7% below the 10-year average.
JPMorgan Chase's deal to take 437K SF at 390 Madison Ave. was the biggest lease of the quarter.
Newmark Knight Frank pegs last quarter’s absorption — the ratio of office space leased to space coming to market — to be negative 1.1M SF. Brokers predict availability will start to increase even more in the coming months.
“The market is facing some headwinds over 2018 and into next year,” said Colliers International Executive Director Craig Caggiano, although he added that 2017 was a “robust” year for leasing activity, so a drop off in Q1 is not surprising.
Financial services, insurance and real estate tenants dominated leasing activity, taking a 45% share last quarter, according to Colliers. Technology, advertising and media tenants made up just 23% of the deals.
Over the next 12 to 18 months, according to Caggiano, a large number of office space blocks sized at 100K SF or more will officially hit the leasing market, which will start to push up availability. According to Transwestern, 14 blocks of 100K SF or more opened up in Q1.
“Tenants are moving around the chess board,” Caggiano said. “When they move to new construction, it leaves a hole.”
A large number of tenants are migrating to Hudson Yards, Downtown or buildings in Midtown that have undergone significant capital improvements. Beauty conglomerate Shiseido Americas Corp., for example, is leaving 900 Third Ave. for 390 Madison Ave., joining JPMorgan and law firm Hogan Lovells, which signed on for 200K SF there in 2016, leaving behind 110K SF at 875 Third Ave.
There have also been several high-profile tenant moves to new development to Hudson Yards or Manhattan West, with companies like law firm Skadden Arps leaving 4 Times Square in 2020 for One Manhattan West.
“On the encouraging side, job growth continues, and you’ve got historically low unemployment in New York City,” Caggiano said, adding that five out of Manhattan’s 18 office submarkets finished the first quarter with post-recession high asking rents.
Overall, the average asking rent in Manhattan during the quarter was $73.05 per SF, which is essentially flat from the previous quarter. However, in places like Midtown South, the average asking rent jumped by 7% from last quarter to hit $71.55 per SF.
In the midst of a shifting office leasing market, investment sales picked up steam in the first quarter, following a sluggish 2017. There were $8.4B worth of sales, according to Colliers, with Google’s $2.4B purchase of Chelsea Market the biggest deal of Q1.
There were $5.2B in total office sales, Colliers found, with the average price per SF at $1,198.
“Demand for office assets has not waned, even as the 10-year Treasury gradually increases,” Colliers Capital Markets Vice Chairman Scott Latham said, although he added that tariffs, volatility in the equities market and rising interest rates are causing uncertainty.
CORRECTION, APRIL 5, 11:15 A.M. ET: Fourteen blocks of office space 100K SF or larger opened up in the first quarter of 2018, according to Transwestern. A previous version of this story incorrectly stated there were 14 blocks total of this size available in Manhattan. This story has been updated.