Manhattan Office Concessions Break New Records As Effective Rents Drop

The competition for office tenants is so fierce in New York City that landlords are offering fatter cash concessions and more creative deal sweeteners in order to fill space than ever before. With millions of square feet set to become available in the coming months, the trend is here to stay.

In Lower Manhattan, concession packages increased 24% to hit $129 in 2017, up from $104 a year earlier, according to the Savills Studley Effective Rent Index, which analyzes lease terms negotiated in top-tier Class-A office buildings. In Midtown, concession packages jumped by 8.5% to hit $181.69 last year, pushing tenant effective rent down by 11%.

The numbers for each submarket broke previous concession records.

“There’s a lot going on behind the headline rent or the asking rent,” said Savills Studley’s Director of U.S. Real Estate Analytics Keith DeCoster. “We've seen the continued escalation of improvement allowances. Even smaller tenants are getting more concession packages.”

Soaring concessions bite into landlords bottom line. Downtown, gross rents went up to $58.46 per SF, according to the Savills Studley 2017 index. But landlord effective rent — what owners are actually bringing in, after accounting for concessions, commissions, expenses and taxes — went down by nearly 24% to hit $12.17 per SF. Midtown saw similar dynamics, with negotiated rent at $96.06 per SF compared to landlord effective rent of $33.93.

The underlying conditions that pushed concessions to these levels are not easing. Over the next nine months, nearly 8M SF of empty office space will be added to the Manhattan market, according to Colliers International. That is in addition to the borough’s 53M SF of available inventory.

Plus, in April, 600K SF hit the downtown sublease market alone, according to Colliers, with Condé Nast listing a total of 350K SF at One World Trade Center, Bisnow first reported.

Landlords will pay for architects and sometimes throw in furniture to get a tenant into a building or to stop them from leaving for somewhere else, leasing experts said. Those expenses are laid against a backdrop of landlords spending big on building renovations and shared amenities that tenants increasingly demand.

“The nearest and dearest to a landlord's heart is that they get their numbers,” said Cresa Managing Director Peter Sabesan, who earlier this year represented coworking space Primary in its deal to take 31K SF at HSP Real Estate Group and Marciano Investment Group’s 251 West 30th St.

Vacancy levels in the building prompted the landlords to throw in free rent, Sabesan said. But he added the rate of concessions varies between buildings and submarkets.

“Wall Street is always a value play,” he said. "There’s lot vacancies."

Concessions are not just about scoring new tenants, either. In the past, lease renewals would not feature as significant tenant improvements or free rent as a new deal would. But renewing tenants are now calling the shots too, and landlords are bending over backward to stop them from leaving.

“The difference between the renewal concession packages and the new leases concession packages has become smaller,” said Colliers International Executive Director Craig Caggiano, although he noted the the rate of concessions dropped a little in the first quarter of the year from the same period in 2017.

“Landlords are looking to keep the tenants they have rather than lose them to new construction," he said. "What has driven these concessions into these highs will continue.”

Others said there is only so far concessions will be able to stretch before landlords need to start cutting their prices.

“I foresee that that will be the next wave," Savills Studley Vice Chairman Jeffrey Peck said. "It’s one thing to throw a lot of cash at tenants in order to attract them to buildings in order [to] maintain face rents, but when that doesn’t work, the landlords will have to respond by lowering the rents.

“In the past, when the availability rate has reached these levels, landlords have generally lowered rents.”