Big May For Manhattan's Office Market Could Create 'Artificial Feeling' Of Good News

Manhattan office leasing jumped significantly in May, sparking hope the market will be able to chew through the vast amount of empty space soon to become available. But the situation may not be as rosy as it looks.

“Although the high-profile leases are making headlines, they are generally for 20% to 30% less space than what the tenant had previously occupied,” Savills Studley Vice Chairman Jeffrey Peck said. “When coworking companies are the most active tenants in the marketplace, it gives landlords a false sense of security.”

In May, a total of 4.2M SF was leased in Manhattan, according to Colliers International, an 82% year-over-year increase, with the second quarter having already surpassed Q1 in terms of the number of square feet leased.

The average asking rent was at $74.04 in Manhattan, a slight increase over the previous year.

“[In] Manhattan overall, absorption was positive for the first time since September 2017,” Colliers International Managing Director of Research Franklin Wallach said, adding that the Downtown and Midtown markets both saw positive absorption for the first time this year.

“In May, you had two leases for more than a quarter of million square feet … A few megadeals can have a dramatic impact,” Wallach said, although he noted most of Manhattan’s office leases are in the 5K to 15K SF range.

But he said leasing activity will have to keep moving at this fast clip to stay ahead, or even on pace, with coming supply. Colliers predicts this year around 7.64M SF of new space will become available.

“[There are] large blocks of soon-to-be-vacant space that we are keeping a close eye on," he said. 

There have certainly been some headline-grabbing deals in recent weeks. McKinsey & Co. inked a 15-year deal for 186K SF at Three World Trade Center. Facebook plans to expand by an extra 370K SF at Vornado’s 770 Broadway. Rockefeller Group signed Blank Rome on for 138K SF at 1271 Sixth Ave. — just weeks after Latham & Watkins signed for 407K SF there. Epstein Becker & Green also leased 80K SF 875 Third Ave.

Those deals should be cast against a backdrop of some vacancies. Wallach pointed to space in buildings like 550 Madison Ave., 63 Madison Ave. and 250 Broadway, all of which will add to the borough’s supply of space looking for a tenant. Landlords are already relying on concessions at record levels to fill their empty spaces.

“Tenants have no problems paying up if there’s something special,” Newmark Knight Frank Managing Director Eric Cagner said. “When it’s ordinary and average, the space needs to be priced correctly in order to move.”

Still, he said the space in the first wave of buildings in Hudson Yards is largely spoken for, and until the next buildings in the megaproject come online, there is not a lot of product available in the Midtown South area for a tenant looking for around 60K SF.

Peck, who was part of the team that brokered last month’s deal for Epstein Becker & Green, said the big leases over the last month don’t tell the full story and can create an “artificial feeling of positive news.”

When Epstein Becker & Green moves to 875 Third Ave., it will be shrinking its office footprint from more than 100K SF at 250 Park Ave. When Deutsche Bank leaves Wall Street for Columbus Circle in 2021, it will be taking 30% less space.

SL Green signed law firm Greenberg Traurig to take space at One Vanderbilt in January, reportedly for between 130K and 140K SF. That is a significant decrease from the 200K SF it currently leases at the MetLife building. 

“[Large-scale] deals are few and far between,” Peck said. “I just don’t think it’s as rosy a picture as what may appear.”

He said coworking companies’ impact on the office leasing market remains unknown. Firms that offer "flexible space" now occupy 9.2M SF in the Manhattan office market, according to CBRE. Knotel, for example, signed a slew of significant leases just last month.

“We don’t know if these 10- and 15-year leases are going to hold over the term of the lease,” Peck said. “And should a coworking company not do well in a particular location, they will close down that location and leave behind an installation that is not usable for any other tenant.”