Tech’s Favorite Manhattan Submarket Could Be Big Loser In The Office Reckoning

Over the past year, tech has been dubbed the saving grace of the Manhattan office market, with Facebook, Amazon, Google and Apple each taking up massive chunks of office space while most private companies had paused their real estate activities.

But as smaller technology companies with smaller office spaces grapple with the future of the workplace, some are looking to shrink their office spaces, jeopardizing the leases that are foundational to the leasing market in buzzy, pricey neighborhoods like Union Square and the Flatiron District. 

“The sub-20K SF deals overall in the Manhattan market are the lifeblood of most of the leasing throughout the city,” Cushman & Wakefield Senior Associate Sayo Kamara said. “It's sometimes hard to track, but they are always the leases that make a difference in driving availability and the absorption in the market.”

These types of leases are especially critical to the market, Avison Young Tri-State Senior Director of Research Marisha Clinton said. Some 91% of office leasing deals across Manhattan were under 15K SF last quarter, she said, an increase in the share of leases from 79% in Q1 2020. 

“Whether it is Midtown South or any other part of Manhattan, during this period of slow leasing, it is these smaller transactions that will for the most part help drive velocity,” she said.

While smaller leases made up a greater share of leasing volume around the city, not a single technology tenant signed a lease under 15K SF in Midtown South last quarter, a decrease from the 92K SF across 14 leases in the first quarter of 2020, according to Avison Young. 

That followed an 86% year-over-year drop-off in tech office deals under 15K SF between 2019 and 2020, data from Avison Young shows. Small tech tenants leased a combined 1.1M SF across 146 deals in Midtown South in 2019, compared to 137K SF across 20 deals in 2020, according to Avison Young. 

Some smaller and midsized companies based in the area are already looking to scale down their footprint. 

Mobile banking company N26 Inc., which is located at 214 West 19th St., had been on the market for 30K SF, but it has downsized its requirement to between 10K SF and 12K SF, according to Avison Young research. Software company Palantir Technologies, which was once looking to sign a lease for 80K to 100K SF pre-pandemic, is now searching for spaces at half the size, Clinton said.

Office owners in Midtown South rely on smaller leases because their buildings have smaller floor plates, said Danny Mangru, Savills director of research for the New York and Tri-State region. A reduction in this type of activity has an outsized impact on the submarket, which includes Flatiron, Union Square, NoMad and Park Avenue South.

“Because you have a lot of product with smaller floor plates, it's more meaningful,” he said. “As opposed to Midtown, for example, where you have larger buildings.” 

NY Tech Alliance Executive Director Andy Saldaña said many of his members — who have flocked to Midtown South over the past decade — are rethinking the size of their offices as they move toward a hybrid work-from-home and office plan. 

“They're taking a look at it and then evaluating their current workspace, maybe perhaps shrinking a bit their footprint, and then offering these hybrid approaches, especially as they've attracted talent that are now remote,” he said. “[They have] people who have relocated to other places, or they've gotten talent from other places.”

Many of these companies are still remote and still figuring out their plans moving forward.

“While we maintained our office space since the beginning of the pandemic, we’re growing solely remotely at the moment and hiring the best people, wherever they are,” Lindsey Dole, senior vice president of people at proptech company Updater, located at 19 Union Square West, told Bisnow in an email. “Our company can operate remotely, so we're waiting until our team members feel fully comfortable before returning to in-person interactions.” 

Seventy-three percent of technology companies predict they will be in the office three days or more, and only 4% say they will be in the office for all five days of the week, according to a recent Savills survey of tech tenants. Some 79% of these companies have employees that have moved away from the market their offices were in prior to the pandemic. 

The dearth of small leases stands in stark contrast to the huge year for Big Tech in New York City. Facebook signed a lease for 730K SF at Vornado’s Farley Post Office near Penn Station amid the pandemic after Apple signed a 220K SF lease in February 2020 at Vornado’s 11 Penn Plaza. Amazon purchased the 660K SF 424 Fifth Ave. in Midtown last year just as the pandemic was taking hold in New York, and Google is spending $1B building out a campus in Hudson Square.

Smaller and newer tech companies will likely take up coworking and flex office space throughout the recovery, Saldaña said, and sign fewer direct leases with landlords. 

Still, brokers and researchers believe that Midtown South will continue to be a mecca for technology companies even if the size of the space they take up is less than it was pre-pandemic. 

“I think Midtown South still will be one of the hot pockets for the TAMI sector,” Kamara said. “Just the type of footprint that those companies are taking in that area, it’s TBD what that shakes out to be.” 

Saldaña predicts that New York will continue to be a hub for technology companies, large and small alike, but that the sector will not be concentrated in one submarket moving forward. 

The result may be more technology offices opening up around the five boroughs, not just in Midtown South. 

“That centralization of new tech startups is kind of dispersing and it was dispersing prior to Covid,” he said. “And I think it's going to continue, especially as people have uncovered some joy in the neighborhood markets.”