NYC's Office Glut Hits Fresh High As Market Bifurcates Even More
The New York City office market is showing even more signs of division between the haves and have-nots.
The haves — owners of recently developed or renovated buildings in Midtown and Midtown South — have been able to raise rents and capture an outsize portion of Manhattan's leasing activity, which in the first quarter of 2022 was slightly higher than the historical average.
The have-nots, particularly owners of Class-B and C office buildings in Lower Manhattan, are experiencing soaring vacancy, dropping rents and questions about their viability going forward.
Roughly 7.7M SF of Manhattan office space was leased in the first three months of the year, according to new research by brokerage firm Savills. That marks a 90% increase from the first quarter of 2021, and it is also above the five-year first-quarter average of 6.5M SF.
But even amid these deals, availability rose to 19%, a new high. The Manhattan office availability rate is now 7.6% higher than it was at the start of the pandemic, and nowhere has that been felt more than in the Financial District, which has the highest availability rate in the city at 26.5%, per Savills.
“Office demand is showing strength with leasing volume much higher now than it was at earlier pandemic lows but is still lagging pre-pandemic norms,” Savills Senior Vice President of Research and Data Services Sarah Dreyer wrote in an email. “It will take time and sustained demand from growing sectors like tech, finance and professional services to offset the amount of supply that was returned over the past few years. We expect availability to remain elevated for the near future.”
Overall, direct space increased by 1.8M SF during the first quarter of the year, and new blocks of space are set to hit the market later this year, like 326K SF at 919 Third Ave. and Brookfield listing the 1.3M SF redevelopment of 660 Fifth Ave.
The availability conundrum will play out for years — there are about 25M SF of office construction and major renovations that are expected to deliver between 2022 and 2024, Colliers has previously estimated.
Other large deals signed in the quarter include Signature Bank taking 280K SF in its renewal and expansion at 1400 Broadway, Touro College leasing 243K SF at 3 Times Square and AlphaSights leasing 236K SF at 100 Park Ave. At SL Green’s One Vanderbilt, several small leases brought the building to almost 100% leased.
Rents are also going up — the average asking rent is at $77.34 per SF, a nearly 2% increase from Q4. Class-A buildings are doing particularly well, with Midtown Class-A asking rents going up by 2.8% to hit $96.44 per SF. Midtown Class-B and C buildings have seen asking rents decline 2.2% from Q4 to hit $59.28 per SF.
Industry players have long warned that lower-quality office buildings would struggle in places like New York City, as new construction offerings hit the market and companies re-evaluate their workplace strategies.
In the last few weeks, owners of Class-B office properties in Chicago and New York City have handed the keys to their buildings over to their lenders, much as owners of Class-B malls have elected to do in recent years.