Manhattan Office Leasing Plummets To Lowest Level In More Than A Decade

The second quarter of 2020, one of the worst three-month periods the U.S. economy has ever seen, is officially over. Initial reports paint a picture of what this crisis has done to one of the world's largest office markets. 

Just under 3.2M SF of leases were signed in Q2 in Manhattan, the lowest quarter of leasing the city has experienced since 2009, the nadir of the Great Financial Crisis, according to data from Colliers International. Leasing activity in the quarter was nearly 65% below Manhattan’s five-year rolling average.

Landlords have yet to drop their asking rents as many hold firm to the belief that the coronavirus pandemic could benefit them long-term, by forcing companies to take more space. Average asking rents decreased by 0.2% to hit $79.32 per SF. 

Commercial real estate players noted the city is slowly shifting into functionality after being totally shut down since mid-March, meaning deal flow should grind back into action. Still, they acknowledge it will be a slow summer, wider threats to the traditional office remain — and there could be significant sublease space coming to the market soon.

Manhattan office availability reached 10.6% during the quarter, the highest it has been in more than five years. It was a far cry from the last few years, when the borough saw record-shattering volume and asking rents.

“It’s definitely going to be a challenge to the Manhattan office market, [but] I found it fascinating and interesting to see the continued tech firm commitment,” said Colliers International Senior Managing Director of Research Franklin Wallach, pointing to TikTok’s lease at Durst Organization’s One Five One in Times Square last month. "I was hopeful going into the second quarter … and there were signs of New York’s continued resilience.”

Still, when comparing the first half of the year to the first half of 2019, leasing velocity dropped by 50%, Colliers data show. In the last six months, the majority of which has been dominated by the pandemic and attempts to contain it, a total of 10M SF of office space was leased in Manhattan. By contrast, over 20M SF was leased in the borough during the first half of 2019.

Along with TikTok’s deal, other major leases of the quarter include the Securities and Exchange Commission’s 241K SF lease at 100 Pearl St. and Mitsubishi’s renewal for 120K SF at 655 Third Ave.

“There are signs of potential pent-up demand, but we are watching very carefully,” Wallach said. “There could be some lingering effects, like sublet supply or asking rents decreasing and the big question of what demand will be like.”

Overall, 21% of the available space right now is sublease space. After the dot-com bubble burst, he said sublease space made up more than 40% of availability.

“There is certainly an indication more sublease space could be delivered,” he said. “It’s something we are watching very carefully.”

Cresa Managing Principal Peter Sabesan said a jump in sublease space is a matter of when, not if.

“There’s going to be a tremendous amount, unfortunately,” he said.

When it comes to pricing the space, he said, many will wait until more people have returned to work in the city and to see if the big landlords like SL Green, Brookfield and Durst adjust their pricing.

“The tenants are all thinking the market is going to crater,” he said. "It is going to be a tenants market. There is no doubt. But the question is, how long does that last?”

”There is a lot of pent-up demand,” he continued. “People have to understand how resilient this city is. All the tech firms want to be here, the young people want to be here — despite the horrible politics of our mayor, New York flourishes."

CBRE Tri-State Director of Research and Analysis Nicole LaRusso believes that now that brokers can tour and spaces are being listed, there could be a downward price adjustment starting.

“On pricing, we don’t expect tremendous change, our forecast says 10%-15% downward in the first year [Q1 2020–Q1 2021),” she wrote in an email. “Also, if NYC keeps on this good trend of declining infections, we could see the economic recovery start to begin here, perhaps before it happens in other markets, where they are still struggling to control the virus.”

New York State hospitalizations from the virus have been below 900 for four consecutive days. The city is now in Phase 2 of the reopening, which has allowed for commercial office buildings to open at reduced capacity and restaurants to serve guests outside. Phase 3, which would allow for personal services like manicures and tattooing, is due to begin on July 6, though indoor dining will not be included, Mayor Bill de Blasio announced Wednesday. 

Gov. Andrew Cuomo said in a press briefing that indoor dining won’t be able to happen “until the facts change and it is prudent.” He said citizen compliance is slipping in New York City.

CBRE Vice Chair Paul Amrich said he ran one tour of a 50K SF space on Tuesday and has three more tours for the office portfolio he represents planned for this week. Few workers have returned to their offices, even though it is now allowed by the state, and Amrich said no one is in a rush to make a deal.

“We don’t want to get ahead of ourselves,” he said. “I would say the conversations and the Zoom calls are now more specifically deal-orientated, rather than just where the market is and where the market is headed. It’s more of a sign that folks are ready to re-engage to consider a transaction.”

He said he and his team have signed a lease or two a week during the crisis, though it hasn’t been anything that indicates the market has opened up.

“Things have gotten better, normal steps as a broker are more of the daily routine and we hope that continues to improve and build as the weeks tick on.”