Office Market Still Moving In Wrong Direction For Manhattan Landlords

Four years following the onset of the pandemic, its impacts are still reverberating for the largest U.S. office market, with availability in Manhattan hitting another new all-time high in the first quarter.

The average lease is getting smaller and asking rents are dipping, according to new Savills data. While competition is fierce for the highest-quality buildings, overall availability was 20.1% at the end of March, up from 19.5% at the end of 2023.

That rise was caused by a drop in leasing activity and more companies listing their space on the market. The 6.8M SF of deals in the first quarter was down 22.9% from the previous three months and a 6.6% dip from Q1 2023. It was also the slowest quarter in three years, according to the tenant-focused brokerage.

The main culprit for the slowdown was a dearth of large leases, said Marisha Clinton, Savills' vice president for research in the Eastern region. After 2023 ended on a high note with 14 leases of more than 100K SF in Manhattan between October and December, only seven tenants took that much space in Q1.

“The way in which people utilize an office space has been more of a focus,” Clinton said. “After three quarters of negative job growth, firms continue to focus on rightsizing their office footprints.”

Financial institutions and legal firms have been behind several of the largest leases signed in recent years, but it was retailers that took three of the four top spots in Q1.

Michael Kors signed the quarter’s biggest lease when it renewed for almost 203K SF at Tishman Speyer and Silverstein Properties’ 11 W. 42nd St. Other big retail leases included Burlington Stores’ 171K SF renewal and expansion at Empire State Realty Trust’s 1400 Broadway and David Yurman’s 151K SF renewal and expansion at Hudson Square Properties’ 200 Hudson St.

Large leases outside of those signed by retailers during the quarter included law firm King & Spalding’s 176K SF relocation to Vornado Realty Trust’s 1290 Sixth Ave., Intercontinental Exchange’s 143K SF lease at Fisher Brothers’ 1345 Sixth Ave., and the Archdiocese of New York’s 142K SF relocation to The Feil Organization’s 488 Madison Ave.

Focusing on deals larger than 100K SF obscures some of the other trends taking place with leasing, Clinton said. Smaller and midsized leases are taking up a growing proportion of the market, and many of them are being signed in the most expensive buildings.

Plaza South, Plaza North and Hudson Yards, with high concentrations of top-flight offices, had the lowest availability by the end of the quarter, coming in at 13.8%, 14.3% and 16.2%, respectively, according to Savills.

Those three submarkets also commanded some of the quarter’s highest asking rents, with Hudson Yards space asking nearly $136 per SF. Asking rents in Plaza North were $112.49 per SF and reached $106.27 per SF in Plaza South.

“There's still heavy leasing going on at the top end of the market,” Clinton said.

The bifurcation also continued to show up at the bottom end of the market. The Financial District finished Q1 with the highest availability rate of any Manhattan submarket at 29.1%. Its asking rents were also the second lowest of any submarket in Q1, at $56.04, with only office space in the adjacent City Hall area asking lower rents than FiDi. 

“The best of the best is in Midtown,” Clinton said. “Whereas the Financial District is lacking that high-end product.”

But even in Midtown, competition pushed rates downward. Asking rents for Class-A properties in Midtown fell for the second consecutive quarter. Midtown’s Class-A asking rents were down by 3.2% from a year earlier, at $90.92 per SF. 

“That has to do with much of the leasing activity that continues to be concentrated at that top or higher-end part of the market,” Clinton said. “When you have stronger leasing in that high end of the market, what's left? You're leaving the lower-priced products available.”