More Landlords Pulling Empty Office Space Off The Market In Face of Uncertainty

A chaotic market has triggered fight-or-flight responses in office owners across New York City, spurring either aggressive plans for acquisitions and renovations or fire sales and quick exits.

But in the face of change, some have simply frozen, firing their brokers and trashing marketing materials, hoping for a more stable day.

“People that do have substantially vacant buildings have this moment in time where they can evaluate their position,” said Spencer Levine, president of developer RAL Cos. “Do they pivot on what that building is about?”

To many, taking that opportunity means stepping away from the typical rent and rerent cycle.

Between January and September, approximately 8.5M SF of office space has been unlisted from the market due to reasons other than leasing, according to data provided by Cushman & Wakefield. During the same period in 2019, 3M SF of office space was unlisted.

The reasons for removal include offices being warehoused by their owners as well as space that was listed being removed due to lease renewals, renovations or conversions.

Manhattan’s 419M SF of office space is 23.5% vacant, according to Cushman & Wakefield’s third-quarter data. The city has weathered more than 10M SF of office occupancy loss in the past 12 months alone, according to C&W data.

Most of the leases that have been signed have been financial services companies expanding on Park Avenue and other companies consolidating their footprints, and the majority of activity has happened in new or recently renovated buildings.

With tenants leaking out of their buildings, landlords clinging onto properties that need new investment to be competitive have had to look at their options. None of them are cheap or easy.

“These landlords are faced with a Hobson's choice,” Wharton Property Advisors President and CEO Ruth Colp-Haber said.

“Either they can take on more debt so that they can give this huge work allowance so that they can give the free rent so that they can pay the brokerage commission and then lock in this lease at a rate that's half of what it would have been five years ago, or they can let the space lie empty and wait for a better day. And many landlords are choosing the latter.”

Interest rates, as well as construction costs, are expected to continue falling, another factor motivating some landlords to pull their empty office space from the market.

While conversions are an increasingly common page in the landlord playbook, many zoning challenges that hold up those projects have yet to be solved with the City of Yes legislation still working its way through the New York City Council. 

As a result, warehousing is increasingly becoming an option.

“Owners across different assets want to make sure that they are in a position to remain nimble,” Current Real Estate Advisors co-founder Adam Henick said. “There's no free lunch out there.”

But it’s not always a show of desperation. For some, warehousing space is a strategic move made with confidence about the state of their building. 

Cushman & Wakefield Executive Vice Chair Ethan Silverstein said that he has worked with several landlords who have decided to take their space off the market because they strongly believe it will score higher rent in a better market.

That includes a building on Madison Avenue, where Class-A space currently has an average asking rent of $120 per SF, above the greater Manhattan average of $81 per SF, according to Cushman & Wakefield. 

Silverstein's client, who he declined to name, has office availability that includes roughly 8K SF of outdoor space, an amenity that is already going for a premium in today’s market. But with office leasing just beginning to recover from its nadir and vacancy still near historic highs, they decided to wait.

“We're not going to assign a lease at the bottom of the market for what is potentially one of the best spaces on Madison Avenue,” Silverstein said. “Ownership is fully prepared to let the space sit vacant for a year or two until a recovery occurs, and then get top dollar for that space.”

Still, the optics of empty space can be an issue, regardless of the strategy behind it. Colp-Haber said that landlords don't always report a vacancy in their building, but it becomes clear that there is a swath of empty space when she visits a property. 

“I'm nervous about where I'm putting my tenants these days. I don't want to put them into a building that's troubled,” Colp-Haber said. “If I see a building that's half empty, that to me means that building’s headed for some type of default with their bank or some type of problem, so I'm veering away from it.”

And warehousing office space often takes more than just turning off the lights, especially for those who are not well-capitalized owners or generational landlords whose debt has been paid off. Lenders, who want to see a profitable future for the asset, also have a say.

“If the business plan is, ‘Hey, we're going to wait and see,’ that's not going to resonate with the capital markets,” Henick said. “You have to be thorough and diligent with whatever you're doing, because you don't know what's going to come down the pipeline.”

Instead, he said that landlords should at least do the due diligence of exploring what a conversion would look like, create renderings of potential renovated office space or conducting other less-expensive tasks in the midterm to prepare for the future. 

For example, when a long-term, triple-net lease expired at 825 Third Ave. in 2019, The Durst Organization decided to hold off on leasing and simply empty out the tower.

The developer then invested $150M in the 530K SF office building, which included building an indoor-outdoor amenity space. The move set Durst up with a Class-A building now asking for rents north of $90 per SF on some floors, with leasing picking up. 

"Owners have to think strategically about how best to position their assets, especially given tenants’ demand for Class A office towers,” Durst Managing Director of Commercial Leasing Karen Rose said in an email. “Given the current lending environment and high construction costs, owners have to consider if now is the right time to make a major investment or pursue shorter-term leases and wait for the environment to improve.”

Even with a new development, RAL Cos. had the same thought process. 

RAL broke ground on its Union Square office project, dubbed Zero Irving, in summer 2019. But as the coronavirus pandemic raised challenges for office, RAL considered warehousing the project and finding a different use for its space, Levine said.

Still, following completion in 2023, the developer decided to move forward with a new understanding of what high-paying tenants want, Levine said.

“You need to understand your property and manage your expectations,” Levine said. “It’s really about having the right expectations and not fooling yourself that pulling this off the market and remarketing it in two years is going to make it something different than it is today.”