New High Set For Manhattan Office Vacancy As Leasing Slump Drags On

Manhattan’s office leasing market stayed slow during the second quarter, leaving owners hanging as office tenants delayed decisions about new space.

Financial and legal services signed the quarter’s largest leases, and renewals made up the majority of the activity, both reversals from this time last year. But those trends are overshadowed by the overall lack of activity in the market compared to historical norms.

“Things were pretty subdued in the second quarter,” said Marisha Clinton, senior director of regional research for the Northeast at Savills. “We're still chugging along here.”

Manhattan’s overall availability hit a record high in the second quarter, reaching roughly 96.4M SF, a 78.9% increase since March 2020, according to Colliers. New construction, major renovations and scheduled vacancies contributed to the increase in vacancy, but it's the long-term trends that are more concerning for market watchers.

JLL Director of New York Research Andrew Lim said there is roughly 25M SF of office space in the city that has been empty for more than two years.

“That is not good for the market, right?” Lim said. “We want space to be leased, we want it to be used. It doesn't make sense in a city as expensive as New York for that to sit there empty.”

The companies that are actually taking space these days are more likely to be financial and legal services firms, which accounted for seven of the 10 largest leases in the quarter, according to Savills.

Paul Hastings signed the largest private sector deal of the quarter when it renewed and expanded to 277K SF at 200 Park Ave., and Wachtell, Lipton, Rosen & Katz renewed 249K SF at 51 West 52nd St. Sheppard Mullin had the eighth-largest lease, renewing and expanding to 108K SF at 30 Rockefeller Plaza.

Four of the biggest leases were signed by financial services firms. HPS Investment Partners renewed and expanded to 160K SF at 40 West 57th St. and Clayton, Dubilier & Rice relocated from the Seagram Building to 144K SF at 550 Madison Ave. Scotiabank renewed 131K SF at 250 Vesey St., plus Singaporean firm GIC Private Limited renewed and expanded to 99K SF at 280 Park Ave.

Total leasing volume during the first half of the year came in at 14.2M SF, down by 12% compared to the second half of 2022, Clinton said. Leasing volume for the quarter was 25.2% below the average Q2 between 2015 and 2019, per Savills' numbers.

Those seven leases also highlighted a significant trend for Clinton: In sharp contrast to a year ago, 49% of leasing transactions during Q2 2023 were renewals or expansions.

“For the second quarter of this year, the renewal vs. relocation activity was pretty much evenly split 50-50,” Clinton said. “But this time last year, new leases and relocations actually outweighed renewals and expansion by 2-to-1.”

Meanwhile, tech leasing — previously a significant driver for office leasing in Manhattan — was a shadow of its former self during the period. The only tech deals in the 10 biggest leases in Q1 were two deals struck by Amazon, signing a  renewal of its 210K SF 1440 Broadway lease and a new 90K SF lease at 75 Rockefeller Plaza.

Tech is the only sector where hybrid work is putting a meaningful dent in companies' space requirements, Lim said, describing fears over smaller office footprints as less drastic than many had feared.

“If everybody comes in on Wednesday, you still need the same number of seats and desks,” he said. “But in tech, we are still seeing that kind of shifting ground and not quite sure of what the new normal will be. In talking about larger firms, there are still a wide variety of policies. I don't think the dust has quite settled there yet.”

Sublease availability also fell 3.3% during the quarter, down from the 15-year high hit last quarter, according to Savills. Available sublease space fell by 730K SF to a total of 21.4M SF on the market, per Colliers.

Lim said the shift "seems to suggest that suddenly space is being taken off the market," meaning one of two things is happening: either tenants are taking back the space they previously subleased, or leases are being allowed to expire.

“It’s too early to tell exactly what is going on there," he added.

Nonetheless, trends could shift in the remainder of the year, analysts said. The largest lease of the quarter bucked the broader flight-to-quality trend when New York City Children's Services Administration signed for 640K SF at 110 William St. The owners of the building, described by Lim as "Class-B," used the lease to restructure its troubled debt, Bisnow first reported.

“There always will be a market for that kind of space, for occupiers that need to be a little more price-conscious,” he said, adding that nonprofits, government agencies and educational institutions are among the potential tenants that could absorb the glut of Class-B and C availability.

But in the meantime, leasing trends showed clear winners and losers among Manhattan neighborhoods, with activity decreasing in 13 of Manhattan’s 18 submarkets, according to Colliers.

Winners included the Plaza District, Savills’ Clinton said, pointing to “the better-quality product in that market” as the reason for its popularity. The gap in asking rents between Class-A and Class-B product widened again in the quarter.

The Grand Central submarket saw the biggest decrease in asking rents in the quarter — down 2.3%, per Colliers — but it also had one of the lowest vacancy rates, hovering at around 4% per data from JLL.

Grand Central Terminal's links to the Metro North, and now the LIRR, make offices nearby a more desirable option for smaller financial services firms that draw their workforces from Westchester, Connecticut and Long Island, Lim said.

“If you have a tenant that is 20K to 40K SF and wants to be in top of the market space around Grand Central, there are only basically three buildings that fit that,” Lim said.

Hudson Yards and Meatpacking are also submarkets that are performing well, he said, with Class-A offices in Meatpacking reaching lower vacancy levels, roughly 2.6%, than before the pandemic.

Midtown and Midtown South extended their dominance over Lower Manhattan in the second quarter. Boutique financial services firms and creative tenants signing in smaller, renovated buildings are holding up Midtown South, while many of the biggest leases were consummated in Midtown.

Midtown’s sublet inventory also decreased, with chunks of space at CIM’s 1440 Broadway, SL Green’s 750 Third Ave. and Vornado’s Penn 2 disappearing from the sublease market, per Colliers. Midtown’s tight availability plus shrinking sublease space contributed to a modest increase in Manhattan’s overall asking rents, which rose by 1.3% to $75.41 per SF.

But other submarkets have languished: The Financial District had the highest availability rate at 29.3%, followed by Park Avenue South at 25.3% and Tribeca at 24.9%, according to Savills. FiDi was already less popular before the pandemic, but its suffering has accelerated since, Lim said.

Times Square, despite its transit connections, has also seen its popularity wane, with Class-A vacancy in the submarket now at 23% and Class-B vacancy above 30%, Lim said.

“Times Square has changed. Now it's a tourist hub. It's not necessarily a place that you would think of as a business district anymore,” Lim said. “Office workers in Times Square, they don't want to have to jostle in the crowds of tourists at lunchtime to get their food.”

Experts expect leasing to remain slow for the remainder of the year, despite Q3 2022’s unexpected blockbuster leasing period. If leasing volume continues at this speed for the rest of the year, 2023’s total demand will fall 14% below last year’s levels, Colliers found. 

Meanwhile, tenants are still in wait-and-see mode, Savills’ Clinton said.

“Summer is typically a slow season,” she said, adding that she expects to see lease expirations continue to drive transactions over the coming quarter. “If there is no sense of urgency to transact, then we can expect a slowdown that we typically see outside of last year's summer month uptick.”

CORRECTION, JULY 7, 5 P.M. ET: A previous version of this article misquoted Marisha Clinton, and misclassified 110 William St.’s building class. This article has been updated.