Climbing Rents, Big Leases Are Dominating The NYC Office Market. How Long Can It Last?

Office leasing in Manhattan is continuing at a blistering pace, although the ballooning concession packages landlords are now handing over are causing some unease.

Off the back of a record year in 2018, Manhattan's office market continued to see high leasing volume and climbing rents. The average rent in Manhattan hit $80 per SF in the second quarter of 2019, a new record, according to figures released by Transwestern Commercial Services this week.

Total leasing volume in the borough was up 20% from last quarter to hit 8.5M SF, the brokerage said.

The statistics paint a rosy picture, and there is no doubting the city’s growth. New York City added more than 820,400 jobs between 2009 and 2018, according to a report from the New York State comptroller, which said the city is in its longest job expansion since the end of World War II. 

And while there is creeping anxiety about the economy, a rate cut and the trade war with China, the stock market reached record highs in recent weeks. 

Storm clouds could be looming, however, though many are buoyed by the impressive numbers. Landlords are doling out incentives, with the average tenant improvement allowance at an average of $104 per SF, up 9% from the end of 2018 per CBRE figures.

"We're long into the cycle, and everybody was expecting a change coming up and we haven't seen it yet," CBRE Tri-State CEO Mary Ann Tighe said. "People in retail are feeling the pain. People in residential condo sales are feeling it. We're just not feeling it at this point in office."

Tighe represented Colgate-Palmolive in its renewal  for 242K SF at Tishman Speyer’s 300 Park Ave. and the landlord at 55 Water in EmblemHealth's renewal for 440K SF last quarter. She said the leasing market appears to still be on a tear, which is surprising considering last year’s record levels

"You would have expected, normally the first half of the year this follows to be one in which the market sort of catches its breath and then hopefully picks up again in the latter part. That was not the case at all this year," she said. "I sound like such a broker — always the optimist — but in fact the numbers are there. They really support it."

Tighe, citing CBRE figures, said that Manhattan’s average net effective rents, which takes things like tenant improvement allowances, free rent and landlord costs into account, are now at $50.56 per SF, their highest in the last decade. The all-time high of net effective rent was $53.10, back in 2007, she said.

The climbing rents are caused by the high number of leases signed at over $100 per SF. Office space in Midtown, for example, is now renting for $10 per SF more than it did a year ago, according to Tighe — and pricey office space at Hudson Yards and buildings like SL Green’s One Vanderbilt and 550 Madison Ave. are helping push rents skyward.

Some of the city’s most notable leases so far this year include McCann Worldgroup’s 450K SF extension at 622 Third Ave., AIG’s decision to move to 320K SF at 1271 Sixth Ave. and BMO Capital Markets' 215K SF deal at Durst Organization’s 151 West 42nd St. 

Earlier this month, advertising giant Publicis Groupe locked down a 960K SF renewal-expansion at 375 Hudson St. — a lease that will show up in Q3 figures.

Savills found that the first half of the year saw 18.4M SF leased — marking the second-highest midyear leasing total since 2014, thanks to multiple leases for more than 100K SF. Availability slid down to 10.6%, per Savills’ Q2 figures.

Savills, a tenant-only services firm, also found concessions are spiking, now at a five-year high. Tenant improvement allowances for long-term, Class-A leases have jumped by 8% year over year to hit $105 per SF, and free rents are around an average of 12 months.

While asking rents are going up, Savills figures indicate they have not quite kept pace with the rise in concessions — a 7% increase for an asking rent compared to the 8% jump for the concession.

“I feel there is a false sense of security because there is a lot of leasing taking place,” Savills Vice Chairman Jeffrey Peck said. “Although the stats show healthy leasing activity, the fact that landlords need to give as much as they are [in the form of] TI and free rent, and create amenity centers in a building that they would normally lease to tenants — it’s not actually as strong as one would think.”

Peck said positive headlines don’t tell the full story. In one of the biggest leases of year, McCann’s deal for 450K SF at 622 Third Ave., the tenant is paying in the mid $50s per SF — below the average for the area, Peck said.

AIG’s lease saw the insurance company shrink its footprint, Peck said. Colgate-Palmolive also shrank the space it will occupy when it renewed on Park Avenue.

Peck said he is concerned about blocks of space being left behind when tenants move. Plus, he notes vast amounts of new office space that will be coming online — some of which has not even shown up in the numbers yet, like Brookfield’s Two Manhattan West, which is currently seeking tenants.

“At this point the landlords are feeling bullish … [But] the vast majority of tenants are not feeling bullish and are being cautious,” Peck said.

On the flip side, jobs numbers are giving people plenty to be upbeat about.

“We are in uncharted territory in the city,” JLL Director of New York Research Craig Leibowitz said, pointing to increasing job numbers.

Bureau of Labor Statistics figures indicate that since 2007, the number of finance jobs in the city has remained relatively stable, and legal sector jobs have gone down by 10% in the last 12 years. But other industries have offset that trend, with technology jobs growing by 58%.

Overall, he said there is a record level of office-using jobs, with about 15% net new jobs added in the city since 2007. Those figures bode well for the future of office leasing in the city.

“When high-value talent is in short supply ... the companies expand or grow in gateway markets,” Leibowitz said. "Manhattan is well-positioned to capitalize on these trends. Talent wants to be here."

CORRECTION, JULY 18, 10:15 A.M. ET: Mary Ann Tighe represented the landlord at 55 Water in EmblemHealth's lease. An earlier version of this story misstated her role in the deal. This story has been updated