Amid A Sluggish Downtown Office Market, Bright Spots Emerge

Despite a banner year — and especially third quarter — for office leasing in other parts of Manhattan, the Downtown office market has slumped, but things may be starting to turn around.

Leasing volume Downtown fell by almost 45% during the third quarter from the year before, according to Colliers International, marking the fourth consecutive quarter with negative absorption, the area's longest stretch since the Great Recession.

Availability for Class-A office buildings sits at 17% according to Savills Studley’s figures, compared to 12% for the borough overall. But in recent weeks, a number of large leases have been inked in Downtown buildings, and brokers say activity is picking up — though it is still a tenant's market.

“I believe there is literally somewhere between 750K SF and 1M SF in leases in progress right now — that I know about,” CBRE Tri-State CEO Mary Ann Tighe, who brokered the deal for Spotify to open its American headquarters at 4 World Trade Center, told Bisnow. "We are going to have a strong finish to the year Downtown, and a very robust start to 2019.”

This week, media company DAZN Group signed up for almost 51K SF at One World Trade Center. Earlier this month, software company BounceX took 79K SF at the building — owned by the Durst Organization and the Port Authority — leaving the New York Times Building on Eighth Avenue.

Frankfurt Kurnit Klein & Selz has signed a 57K SF lease at 28 Liberty St., landlord Fosun announced Tuesday, where the law firm will move from 488 Madison Ave. RXR Realty last week announced it had scored the largest direct lease of the year for Downtown at 32 Old Slip, with law firm Cahill Gordon & Reindel taking 200K SF there.

“I just think, right now, it’s a timing hiccup,” Tighe said, adding that deals everywhere have been slow to close. “If you said anything [that is concerning about the Downtown submarket] it would be the sublease space, other than that … The vitality has been incredibly strong.”

Manhattan had a strong leasing year, but that has done little to make an impact on the city's vacancy rate.

As the amount of new office inventory grows, companies are increasingly taking less space. When Deutsche Bank leaves Wall Street for the Time Warner Center, for example, it will shrink its presence in the city by 30%. 

“Availability is not declining in any significant fashion,” Savills Studley Senior Vice President Gerry Prager said.

There has been 28.5M SF leased in the borough year to date, the highest level since 2014, according to Savills Studley. In that activity, flexible workspace providers remain the dominant players; WeWork added 500K SF during the quarter, Spaces leased around 300K SF, taking several big blocks of space off the market, and Knotel announced five new locations.

But the city is not keeping up with the amount of supply that is coming. The availability rate remains basically flat from the previous quarter, sitting at 11.6%.

"I don’t think the market is going to tighten to any degree," Prager said. 

Downtown, which has seen significant rent price increases over the last few years, is still seen as a good deal for tenants, brokers said.

“There is still hundreds of thousands of square feet coming to the market, [and that has] created opportunities for tenants,” Savills Studley Vice Chairman Jeffrey Peck said. “There are deals to be had Downtown through the sublease market.”

He said he is representing two clients that are moving from Hudson Square to Brookfield Place on sublease deals, though he declined to give specifics of the deals.

“Many tenants are not looking to build space, they are looking to take over an existing space and modify," he said. "The sublessors need to compete with landlords and offer tenant improvement and free rent.”

Newmark Knight Frank New York Tri-State Region President David Falk agreed Downtown still represents a discount. He said tenants will pay about $20 per SF more for a Class-A-minus building in Midtown, compared to Downtown. Falk's team took over for Cushman & Wakefield in representing Durst and the Port Authority in leasing up One World Trade Center. 

Falk added that larger floor plates in places like Midtown South are now all gone, making Downtown attractive to tenants seeking space at 40K SF that don’t want to be spread over two floors.

"Downtown is really getting better every day. I am not just saying that to give a good spin,” he said. “It’s as well-positioned today as it’s been since I’ve been in the business.”