Tech Turmoil Drives Manhattan Sublease Availability To 15-Year High

The amount of office space on the sublease market in Manhattan surpassed its pandemic-era peak last month and is higher than at any point since 2008, according to new Colliers data provided to Bisnow.

Corporate belt-tightening — especially in the tech sector — has led many companies to see if they can recoup some real estate costs by finding a taker for excess space. Already this year, the Winklevoss twin's crypto firm, Gemini Trust Co., has put 51K SF of its office on Park Avenue South up for sublease, and this month, Roku started marketing a quarter of the 240K SF office deal it signed last year at 5 Times Square, Bisnow has learned.

"[Roku] obviously had plans to grow into that space," Savills Vice Chairman for New York Nicholas Farmakis told Bisnow. "Nobody ever leases a space and occupies it 100% on day one, but I don't think they were expecting to sublease a portion of that space to then grow into it. [...] Putting 60K SF back on the market, I think, is probably a really good indication of what tenants have been thinking.”

There was roughly 24M SF of sublease availability in Manhattan at the end of February, said Danny Mangru, Avison Young's regional manager of innovation and insight. By the end of this month, he expects that number to hit 25M SF, which would be "a two- or three-decade high," he said.

"You kind of look at any chart, you're just seeing kind of more of a hockey stick in terms of sublease, you just see it keep going up," Mangru said. "When we close off Q1, we will be most likely at a two- or three-decade-long high."

Manhattan currently has 93M SF of office availability, which is a 75% increase since March 2020, per Colliers, which found that nearly 22M SF of that availability was sublease space, a number that is only set to increase as tech companies like Twitter and Amazon are expected to add space to the market.

“Tech has added a lot to the sublease market,” said Reeves McCall, vice president at CBRE’s Midtown Manhattan offices. “I think many would also argue that they may have gotten a little out ahead of their skis pre-Covid. So maybe there was more of a land grab than there possibly should have been.”

Tech is far from the only sector reconsidering previously signed leases. For the past 18 months, Pfizer has been seeking a long-term subtenant for over 150K SF of its upcoming 800K SF headquarters at The Spiral. The pharma giant's 20-year lease with developer Tishman Speyer kick-started construction of the 2.85M SF tower, which is expected to wrap up in the first half of this year.

Subleasing is part of any healthy office market, and many companies sign for larger spaces than they need, then sublease a piece on a short-term basis while they grow.

Nevertheless, Pfizer's move already represented a reduction of about 400K SF from the Midtown East headquarters it is vacating. Its new neighbor, HSBC’s planned relocation to The Spiral, will also see it leaving behind space at 452 Fifth Ave., and Macquarie’s planned departure from 125 West 55th St. to 660 Fifth Ave. will leave another sizable hole in an older building.

The key factor driving those deals is location, experts said. More sublease space has become available in Lower Manhattan than Midtown, which is seen as more accessible, and streets that are a few long blocks from a transit hub are performing demonstrably worse than towers like One Vanderbilt, which sits atop Grand Central Terminal and is nearly fully leased at record rents.

“We definitely have our eyes on some older products in the Financial District or older product on Third Avenue,” JLL New York City Vice Chairman Cynthia Wasserberger said. “Some of the more theoretically inferior locations might suffer more than the better buildings that just happen to be faced with a tenant vacancy.”

While Pfizer's space has sat on the market, companies that want to shed space in Class A buildings have a market as companies think about what offices and locations will be most attractive to their workers, Cushman & Wakefield Senior Associate Sayo Kamara said.

“If it's prime space, you can probably move it within six to eight months,” he said. 

But office owners looking to backfill space in Class B and C properties will face increasing downward pressure on pricing as they compete with tech companies making an unexpectedly robust appearance to the sublease market.

“Sublet space always puts downward pressure on pricing. As of year-end 2022, sublet space was priced at about a 25% discount to direct space,” said Frank Wallach, executive managing director of research and business development at Colliers. “It does put — all else being equal — more pressure on landlords.”

JLL Vice Chairman in the Corporate Advisory Services Steven Rotter expected to see tech companies slow down and put large blocks of high-quality space on the sublease market in early 2023, following decisions by Twitter, Amazon and Meta to sublease space.

“But it's been surprising, because I oversee a lot of the tech business at JLL, and we have not seen that much tech space actually hit the market. I would say that most of the tech space that has come onto the market is a lot of the B class and C class space,” he said. “Of all the sublease space that's hit the market in 2023, 70% of the space is in Class B and Class C space. I'd say that only a third of the space is really in the Class A buildings.”

Those listings make it even more challenging for owners of older buildings facing vacancies, who are already facing a difficult financing environment as lenders back away from office deals.

“I would not want to be a landlord facing a major vacancy and a major capital project,” Savills’ Farmakis said. “If you're going to have a large chunk of vacancy coming up, you will have to reinvest in the building or it just won't lease.”

Class B and C owners that can’t afford to refinance or upgrade will face challenges, but when that reckoning comes and which owners get hit is yet to be seen, Cushman & Wakefield’s Kamara said.

“Some of it is a waiting game and some of it, honestly, is getting lucky and being able to have a properly financed asset to make it through the next probably couple of years as office shakes out,” he said.