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Owners Of Not-Quite-Trophy Buildings Getting More Malleable To Compete For Tenants

Office leasing accelerated in a big way at the end of last year, with space in the crème de la crème of real estate being snapped up by tenants eager to return to the office.

Now, with that inventory dwindling, companies seeking office space are turning toward the tier just below, where there is still near-record vacancy. With lenders watching closely, the pressure to fill space is more intense than ever — as is the competition. That means bending more to the will of the tenant.

“Landlords don't care for these flexibility options because it inevitably ties them up. They're dealing with a vertical jigsaw puzzle,” Cushman & Wakefield Vice Chair David Hoffman said. “It’s just the lesser of the evils.” 

Last year, Manhattan leasing reached nearly 40M SF, up 17% from 2023 and marking the best year since 2019, according to a report by Avison Young. However, leasing has become concentrated in top-tier assets in prime locations.

Just 85 buildings, which command rents of $100 per SF and up, captured a third of Manhattan's total leasing activity in 2024, according to a report by JLL

In certain buildings and submarkets, inventory has been drained as tenants have paid top dollar to move in. That includes Hudson Yards and the nearly fully leased Spiral building as well as the Park Avenue corridor, which has become a magnet for finance expansion.

But there is an ocean of available space — Manhattan’s vacancy rate is above 17%, according to Transwestern, with 78.5M SF on the market. With construction near all-time lows, the current dynamics could provide opportunities for those holding what is considered Class-A-minus or B-plus space.

Though labeling office class is more of an art than a science, these buildings are still too high quality to convert to other uses or tear down but are generally older with fewer amenities.

“It's definitely not always a black-and-white definition of A versus B. It's more of a feeling,” Transwestern Senior Vice President Lauren Davidson said. “But for Class-B buildings, I think there's no choice but to be a bit more flexible.”

High-quality inventory being removed from the market has already caused the average asking rent of $75.70 per SF to decrease 1.1% from the third quarter, though it’s 2.2% higher than a year ago, according to Transwestern data.

“There's a much thinner construction pipeline and not as many office completions as we had in the last several years,” CBRE U.S. Head of Office Research Jessica Morin said. “Now [tenants] have to make a choice. Do I stay where I am for a couple more years and wait for new construction? Do I move to a different submarket that's not as ideal, but it's a high-quality building? Or do I stay in the submarket that I want but take a lesser building?”

That's a decision Jane Street is mulling with its current landlord, Brookfield Properties.

The financial firm occupies 500K SF at 250 Vesey St. but is looking to expand. Brookfield, in an attempt to keep Jane Street and allow it to grow its footprint at Brookfield Place, has offered to vacate some of its own offices in the complex so Jane Street can move in, Bloomberg reported in December

Jane Street and Brookfield declined to provide an update on negotiations.

With the future of office usage still a moving target, tenants are pushing landlords to allow them to both expand and shed space as needed, brokers said.

In November, Ropes & Gray announced its relocation to 1285 Sixth Ave. The deal was reported to be for 430K SF, but expansion options could result in the law firm taking as much as 535K SF in the tower. 

Similarly, shorter-term leases have become more ordinary. And not only have tenants negotiated rights to renew, but the right to terminate a lease early has become increasingly common. 

That allows tenants to avoid the need to sublease if things go wrong and provides them with a hedge in the future.

“Even though common wisdom is that the market is going to continue to improve, if it doesn't, then it's a leverage point for the tenant to go back to the landlord and say ‘My rent is above market right now, I can either exercise my right to terminate and move someplace else for less money, or we can talk about new terms for my lease,’” Hoffman said.

Hoffman said he is currently reworking an approximately six-year lease with a right to terminate after three years. In that deal, three years have passed and the undisclosed tenant has realized that it needs more space than it currently has signed up for.

While that tenants is deciding if it will stay or go, in other buildings, landlords have been able to happily accommodate growing tenants.

Davidson detailed a tech firm that signed a 1K SF lease near Grand Central Terminal in Midtown. Several years have passed since its original lease, and the firm has expanded its footprint by approximately 50% each year, receiving a newly furnished unit each time.

Landlords are also upping their incentives to prospective tenants.

In the first half of 2024, tenant improvement allowances were up by 37% in top-tier buildings, which are defined as Class-A, and 51% in lower-tier buildings, defined as Class-B or C, compared to 2019, according to CBRE research.

For Class-A landlords, those allowances have paid off, with base rents continuing to climb, according to the report.   

In some instances, Hoffman said that he’s managed to turn those TI allowances into additional rent credits. In others, he’s had landlords hire architects to do test fits for potential tenants in order to allow them to visualize a speculative plan for the space.

Some landlords have offered to furnish office space themselves, further alleviating costs.

In 2019, The Durst Organization launched Durst Ready, which provides fully furnished offices, along with expedited leases, across its 13M SF portfolio. Since launch, the program has resulted in 61 transactions totaling nearly 600K SF, according to Durst.

In other parts of the country, landlords are more desperate.

At 1455 Market St. in San Francisco, Hudson Pacific Properties agreed to give the city government an array of concessions to convince it to lease more than 157K SF of the 1M SF tower, the San Francisco Chronicle reported in March.

That includes a TI allowance of $100 per SF and the ability to acquire furniture left by former tenants for just $1. By the end of 2027, the city can expand its footprint in the building into as many as four other floors.

Plus, as long as the city leases 400K SF of the building by 2027, a purchase and sale agreement can be executed. The price would be set at fair-market value determined by an appraisal at the time of sale, according to the Chronicle. 

San Francisco's office market has a vacancy rate of over 36%, with 26.4M SF sitting empty, per Transwestern.

Meanwhile, delinquencies for loans tied to office buildings have continued to tick up. As of December, about $1.3B in office loans were freshly delinquent, according to a national report by Fitch Ratings.

Overall, the delinquency rate for office buildings reached 7.2%, up from 6.3% in November. 

Davidson said that certain landlords are known for working with tenants of all sizes and offering easy terms. That can prevent weeks of back and forth between attorneys, during which tenants could pull out at any point.

“A lot of this is reputation within the brokerage community,” Davidson said. “You go and tour in the morning, and you could have a lease in your hand by the end of the day.”

“I don't know that I would call it concessions, as opposed to the way that landlords are viewing deals.”

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