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Manhattan Office Leasing Sinks 30% Despite String Of Big Deals

This summer in New York, typically a time of feeble leasing, was particularly lackluster this year — even with some blockbuster deals signed.

New York City skyline

Some 6.3M SF of leases were signed in Manhattan in the third quarter, per Savills data released Monday, marking a 31% decrease from the same period last year. Availability increased by more than a full percentage point from last year to reach 19.6%. Sublease availability, which soared to peak levels at the start of the year, declined significantly, falling 1M SF from last quarter to 20.6M SF.

It comes as New York landlords, brokers and tenants closely watch how return-to-office mandates will impact leasing in the city. Firms like Facebook, Amazon and Google, all major city employers, have enacted rules around office presence. Those mandates are seen as a possible boost for the sector, but issues like rumored big blocks of sublease space soon to hit the market and the fallout of WeWork’s possible demise are likely to dominate the rest of the year, according to Colliers Executive Managing Director Franklin Wallach.

“Demand will need to increase in order to outpace supply. … Even though demand grew by more than 25%, the availability rates still increased,” he said. “There are still some challenges ahead to the market as we look to the fourth quarter, 2024 and beyond.”

Davis Polk & Wardwell LLP signed a 25-year lease extension and expansion at RXR’s 450 Lexington Ave. in August.

Colliers data also indicates a slip in leasing from last year, with total volume 11.8% below Manhattan's five-year rolling average. Rent in the quarter slipped slightly to $75.28 per SF, according to the firm. 

Still, green shoots emerged in the form of market-moving leases that were inked during the quarter, with the legal and financial services sectors accounting for over half of the deals. Law firm Davis Polk locked in a 710K SF renewal and expansion at 450 Lexington Ave., marking the biggest deal for the quarter and the largest deal in Manhattan in two years.

The Department of Citywide Administrative Services renewed for 183K SF at 225 Greenwich St., and Tower Research Capital locked in a 122K SF relocation at 120 Broadway. Meanwhile, at 110 William St., the city of New York took 641K SF, which Colliers said is the largest deal signed downtown since 2019.

“It was encouraging in view of those silver linings,” Wallach said. “The story is not written.”

He said that while there has been 43M SF of negative absorption since March 2020, there are now areas where availability increases are moderating. In Midtown, there was the strongest quarterly reduction in sublease supply in nearly two years, he said. Even though the availability has doubled downtown in the last three and a half years, over the last 12 months, supply has only increased by less than 5%, suggesting a slowdown.

110 William St., where the city signed a 641K SF lease in Q3.

While sublease availability has tempered, the problems haven't totally abated.

“There are rumored sublet blocks that could be coming to the market in the next few months,” he said. “There are conversations about WeWork and their landlords."

Some 64% of WeWork's Manhattan leases are in Class-B and Class-C buildings, as Bisnow previously reported. 

The drop in leasing aligns closely with the decrease in office-based employment, Savills Senior Director of Northeast Regional Research Marisha Clinton said.

“A lot of the office leasing activity that we saw during the quarter has been expiration-driven rather than discretionary,” she said, adding that tenants signing bigger deals is an encouraging sign. “I still like to look for the bright spots … [like] the expansionary nature of those tenants who did choose to relocate. So among such tenants who signed leases of 20K SF and greater in the third quarter, 70% of those actually took on more space.”

Alternative investment manager Marshall Wace took 79K SF at Tishman Speyer’s the Spiral in August, a deal Clinton said was an expansion from the 36K SF it leases at 350 Park Ave.

Data from the quarter also painted a gloomy picture for Class-B and C office deals.

While Manhattan's Class-A rents went up in the quarter, hitting an average of $86.95 per SF, that was nearly 40% higher than Class-B and C buildings, per Savills data. And while vast development has dominated the last few years, the pipeline is now narrowing, according to JLL.

The amount of square footage under development is at its lowest rate in seven years, the brokerage’s data suggests. JLL New York Director of Research Andrew Lim said the rise in interest rates has put a damper on new office development, which remains the most in-demand part of the market.

In the last five years, he said, there was 43M SF of new construction to hit the market in Manhattan. In the next five years, that is due to shrink to less than 15M SF.

“I think it's one way in which the supply issue, in one sense, will be sorted out at one end of the market,” he said.

“There are opportunities once interest rates go down for already-existing assets that are getting well located, have good bones to be invested in and to have new amenity spaces, renovations and things like that,” he added. “Those properties as well may be able to compete again at the level or the price point of newer construction.”