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Manhattan Had Its Best Office Leasing Market In 17 Years In 2018

On the back of several blockbuster deals and major flexible workspace provider expansion, office leasing approached a 21st-century record in Manhattan last year.

New York City skyline

Just under 42M SF was leased in the borough in 2018, according to Colliers International research, including new leases, renewals and expansions. That was up 13% from 2017’s total of 37M SF, and the highest yearly lease volume since 2001.

Rents were also strong, with the average asking rent for the borough hitting just shy of $76 per SF.

Meanwhile, CBRE’s figures showed 2018’s new leasing and expansions total — which hit 32M SF, according to the brokerage — surpassed the average annual figure over the past decade by 26%.

“This year has bettered any year in the last two market cycles,” Colliers International Executive Director Craig Caggiano said. “The total of 41.75M SF, I mean, really is a remarkable number.”

Brokers put the strong year down to a few major factors. Business and job growth, along with a robust economy, is keeping the market healthy. Financial, insurance and real estate, known as FIRE, tenants took some of the city’s most significant deals, and coworking and flexible office space providers (which fall under FIRE) expanded rapidly throughout the year.

WeWork now has more than 7M SF in New York City, and overtook JPMorgan Chase as the city’s biggest private tenant last year, while Knotel now has 100 locations with more than 2M SF, with much of its expansion in Manhattan. Amsterdam-based Spaces stitched up several high-profile New York deals this year, too. The growth of the trio and the other players in the segment has forced landlords to examine how they can adapt and change to avoid seeing their business snatched away from them.

Meanwhile, some of the world's biggest companies propelled the leasing market forward, with deals like Deutsche Bank’s 1M SF move to One Columbus Circle, JPMorgan's renewal for 855K SF at 277 Park Ave. and Pfizer’s lease at Tishman Speyer’s Hudson Yards tower, known as the Spiral.

Spaces Hudson Yards

In Q4 alone, 10 transactions for more than 100K SF came from the FIRE sector, according to Transwestern data.

“If we were talking at this point last year, I would’ve said it would be a good year, not the second-best in the century,” Collier’s Caggiano said, adding that 2018 ended with positive absorption of 1.8M SF. “I would have thought rents would have remained stable. I would have thought availability may have been a little bit down, I definitely thought we would have been in negative absorption.”

Midtown saw the most leasing success in the borough, with 21M SF and four of the five biggest deals in Manhattan, including JPMorgan Chase’s renewal and Deutsche Bank’s move from downtown.

Asking rent in Midtown hit an average $83 per SF, 9.5% lower than the record high in the third quarter of 2008, indicating rents have not yet recovered to their pre-recession highs in that submarket.

Downtown, which has been lagging behind its counterparts in Manhattan for some time, saw the lowest levels of leasing activity. Last year, there was 6.32M SF leased there, and the numbers would have been weaker if not for a strong fourth quarter.

However, Caggiano pointed out that while its leasing volume declined from the year before, it was still downtown’s fourth best year in the past decade and that it saw positive absorption. Plus, this year has kicked off with a mammoth lease for the area, with NYC Health + Hospitals taking more than 500K SF at GFP Real Estate’s 50 Water St. 

The Spiral will be a 1,031-foot tower on Manhattan's Far West Side, the new headquarters for Pfizer.

“It was really remarkable all of the different industries that contributed to the leasing activity,” Colliers Senior Managing Director Franklin Wallach said, pointing to Facebook’s reported expansion plans in the city, Google’s new Hudson Square campus and large government and nonprofit leases across the city.

Still, not all brokers believe the outlook is completely rosy.

Savills Studley Vice Chairman Jeffrey Peck said that technology company leases and coworking expansion could be creating an “artificial confidence level" among landlords because the availability sector would be much higher if those sectors were not taking as much space as they have been this year.

“If a landlord had a significant block of space that normally would have taken 18 months or 24 months to lease in a normal cycle, it’s getting leased much quicker, therefore giving the feeling that the market is much stronger than it actually is,” he said.

Peck said tenants are still densifying, taking less space per employee, and there is still a significant amount of new construction office space becoming available. Those are two major factors he expects will impact the office leasing environment throughout 2019.

Transwestern Research Manager Danny Mangru said his firm is tracking large blocks of space that will be enter the market next year. Transwestern found that in the last quarter of the year, there were 35 new leases over 50K SF, and 16 new leases recorded over 100K SF. In total, there was more than 10M SF of leasing activity in Q4.

“I think that leasing activity is going to remain healthy,” he said. "To say we will have another stellar year … hard to say for now."

He pointed to more than 300K SF at SL Green’s 625 Madison that will be left vacant when Ralph Lauren consolidates at RXR Realty’s Starrett-Lehigh Building, and the space that will be added to the market when the renovation of 550 Madison Ave. is complete. 

“We are going to keep an eye on leasing activity to see if will keep up,” he said. “Relatively speaking, it will remain healthy. We are still projecting it will be on that upward trajectory in terms of asking rents. The blocks that are coming back are going to be high-priced.”

Mangru said that the Midtown South asking rents are now at $80 per SF, just 17 cents lower than Midtown. The Hudson Square area saw a massive drop in availability, going from 13% in the third quarter of the year down to 7% in Q4 as the result of Google’s leases.

Amazon’s plans in Long Island City have office landlords in that area expecting increased demand and a spillover effect. Facebook and Google's expansion are seen as indicators the city is angling to take on Silicon Valley as a tech hub.

“It’s a great story and it’s exciting to see,” Newmark Knight Frank Senior Managing Director Eric Cagner said. “Going into 2019, you have to imagine that inventory to some extent … will remain tight. That does place some pressure on rents to remain where they are, if not push up slightly.”