2020 Was The Manhattan Office Market's Worst Year This Century
The last quarter of 2020 capped a disruptive year for the world's largest office market as asking rents fell, availability increased and leasing activity dropped.
Manhattan saw its slowest year for leasing since the start of the 21st century, with just 20.5M SF leased in all of 2020, according to Savills. While some hold out hope that the widespread distribution of the COVID-19 vaccine will usher in a recovery in 2021, what that will look like is still largely uncertain.
While leasing volume increased nearly 50% between Q2 and Q3, it took a hit in the last three months of the year, decreasing 13.4% from Q3, according to Colliers International.
Companies are trying to get rid of their space at rates not seen since the Great Financial Crisis, with sublet space making up nearly a quarter of all Manhattan office availability, according to Colliers.
Asking rents saw a steep, year-over-year decline, dropping 5.6% from $78.78 per SF in Q4 2019 to $74.39 per SF, according to Colliers. The year-over-year drop for Class-A office buildings was even greater, with an 8.6% decrease from $98.94 to $90.42, according to Savills.
Seven of the 10 largest leases inked last quarter were renewals, according to Savills, including NYU Langone’s 633K SF renewal at Vornado’s One Park Avenue and Centric Brands 212K SF renewal at Empire State Realty Trust’s 350 Fifth Ave.
“I think Q4 really closed the year out and shows the full effect of COVID-19,” Savills New York and Tri-State Research Director Danny Mangru said. “When you look at this from a supply and demand perspective, you’re seeing the opposite sides of the spectrum.”
Midtown had the highest office availability rate in the city, at 15.2% in Q4, compared to Downtown at 13.9% and Midtown South at 13.4%, according to Colliers. Midtown is experiencing a major reckoning as the tourism, entertainment and retail that fueled its decade-long dominance all but disappeared last year.
Availability still hasn’t hit its peak, and demand will continue to be sluggish, Mangru said.
Tech-favored Midtown South had the highest year-over-year drop in rent at 8.8%, while Midtown saw a 4.1% drop and Downtown rents fell 3.5%, according to Colliers.
Midtown’s rents never fully recovered from the last recession, which left them with less “wiggle room” to drop prices compared to the other two submarkets, Colliers Senior Managing Director of Research Frank Wallach told Bisnow.
But while Midtown seems to have its back up against the wall, it may return faster than the other markets coming out of this, he added.
“Midtown is really well-positioned post-coronavirus,” Wallach said. “It is poised to come back because it can meet shifting tenant demand.”
Wallach points to the density of Class-A office space with large floor plates in the area, its proximity to transportation hubs, the fact that many buildings in Midtown have upgraded air filtration systems and that it is competitively priced as reasons for its potential comeback.
“In a complete paradigm shift, many of the opportunities for value-seeking tenants are now in Midtown,” Wallach said.
When asked to predict what comes next for Manhattan's office market, the researchers said they don't have clarity just yet because there is so little activity.
“By the second half of the year, we’ll have a clearer picture of what is to come,” Savills’ Mangru said. “Just like with most trends, we look for the trendsetters and that hasn’t really happened yet … We haven’t seen many new, longer-term leases.”
Some hope that a vaccine rollout may prompt the market’s recovery.
“The office market has generally remained frozen in 2020,” Transwestern New York co-founder and partner Lindsay Ornstein told Bisnow last week. “With the vaccine rollout underway and a strong yearning by many tenants to return to an office environment, we expect the thawing to begin in the spring of 2021. As confidence rises, leasing activity should begin to pick up.”
The “work-from-home experiment” will likely impact the future of work, Ornstein added. And while the long-term place Manhattan offices will have in the economy isn't clear, the next few months are sure to be difficult.
“The potential for a lockdown … which is just hovering over us, like the ghost of Christmas past, for the last few weeks,” Colacino said. “The vaccines brought out a lot of positive energy for people, but it created a whole new round of confusion.”