Commercial Clients Not Betting On Bear Office Space Market Study Says

Midsized to large tenants of commercial office space are not betting that the cost of office space will drop in Manhattan any time soon, and they are responding by renewing leases several years in advance.

Although it has been assumed by some bearish commentators that a downward market correction is in the works, due to the oversupply of office space and predictions of a general economic downturn, larger tenants are mostly renewing for longer-term periods, according to new research by Colliers International.

Of those tenants who have renewed for short-term leases, many have faced exceptional circumstances where a shorter-lease made sense, the study found.

"We heard throughout last year that much of the leasing activity represented short-term deals from tenants looking to hedge the market," Collier Tri-State executive director Craig Caggiano said. 

Of all lease renewals 25k SF and larger that closed in the last two years, only 18% were for less than a four-year term, according to the report. Most large commercial leases are signed for terms of 10 to 15 years.

“A healthy percentage of the renewal market above 5k SF in 2015-2016 came from tenants who acted early, by an average of 5.7 years," Colliers Manhattan research director Chen Zheng said. "We thought perhaps landlords wary of oversupply in the coming years were offering competitive terms, but these early renewal deals on the whole were consistent with market averages.”

Short-term tenants came from all major Manhattan industry sectors, and did so for reasons other than to time market conditions. Citadel, at 601 Lexington Ave., and the permanent UN Mission from Turkey are waiting for new construction to finish before they move to new buildings. Verizon signed a nine-month deal at 550 Washington St. because its owners, Westbrook Partners and Atlas Capital Group, are considering changing their building to a mixed-use campus.

The report found other short-term lease renewals in unique circumstances. Philip Nizer closed a two year renewal at 666 Fifth Ave. where ownership is only considering short-term renewals. The U.S. Equal Opportunity Employment Commission has had one-year renewals at 33 Whitehall St. for many years.

Large tenants generally renew early as a matter of standard practice. McGraw-Hill Financial renewed its deal for 900k SF at 55 Water St. in March 2016 for 12 years in a $750M deal, five years before their lease was scheduled to end in 2020.

"There are a number of reasons for tenants to renew their licenses early, and future pricing is one reason," said CBRE vice chair Howard Fiddle, who repped the owner of 55 Water St. in the deal. "Another reason McGraw-Hill renewed early was because they were offered an improvement allowance to make major changes."

Had McGraw-Hill moved, it would have had to occupy its space for four years without making the improvements it wanted.

"The lesson here," Fiddle said, "is that, despite reports of economic changes and anticipated additional future supply of office space, the future supply in Manhattan is leasing fast. The world is not coming to an end, the economic future is strong."