Following a Record Year, Leasing in Manhattan Kicks Off with Strong First Quarter
Despite a flood of new office supply hitting the New York market in recent years, demand for office space in Manhattan is keeping up, pushing rents to new heights.
Just over 9M SF of office space was leased in the first quarter of this year, a 20% jump over the first quarter of 2018, according to Colliers International figures. And while availability rate increased to hit almost 10%, rents reached an average of nearly $77 per SF, a new record, per Colliers.
Meanwhile, Savills research indicated similar figures, with the brokerage noting Q1 2019 was the second-best leasing volume quarter in the last five years, second only to the same time last year. The strong quarter is the continuation of the stellar office environment of 2018, sources said, which recorded leasing volumes not seen in decades. Growing coworking providers and strong tenant appetite for pricey new and refurbished offices are behind the health of the sector, they said, along with increasing job growth and a robust economy.
“We have seen this quarter after quarter, even when we’ve had increased supply, we’ve seen strong leasing [and] rising prices,” Colliers New York Tri-State Executive Director Craig Caggiano said. The past decade has been one of enormous shifts in the Manhattan office leasing ecosystem. Vast amounts of new construction and tenant demand for top amenities have forced landlords to renovate space or build anew, and companies have flocked to Hudson Yards and to new buildings Downtown.
“Since the Great Recession, almost every market and building class has recovered to their pre-recession prices, or greater," Caggiano said. "The only market section that hasn’t is Midtown, Class-A office buildings.”
Savills Senior Managing Director Gabe Marans described the quarterly figures as “a continuing of record leasing over a nine-year bull period.”
In Midtown, a total of 4M SF was leased, an 11% year-over-year increase, and average rent jumped 5% to hit $83 per SF, per Colliers. Midtown South slowed, however, with leasing velocity falling 17% from 2018 to 2M SF. Rent increased by 2% to reach $78 per SF.
Downtown saw more than 2M SF leased, a two-year quarterly high. Average rent there was $62 per SF.
“The only area that I see right now that is weaker is the area from 46th Street to 57th Street on Third Avenue and Park Avenue,” said Cresa Managing Principal Richard Selig.“Tech companies aren’t moving into the area because there are fewer amenities.”
Major transactions during the first quarter included New York City Health and Hospital Corp.'s lease of 527K SF at 40 Water St., aka 7 Hanover Square, and Citadel’s additional 120K SF at 425 Park Ave.
Lyft inked a deal for more than 100K SF at Cove Property Group’s Hudson Commons, and Akin Gump Strauss Hauer & Feld LLP renewed for 280K SF at 1 Bryant Park.
Coworking providers, which took up space at a breakneck pace in 2018, were also major players in the first quarter. Knotel added seven new locations in the first three months of the year, WeWork leased 200K SF at 199 Water St. and Convene is planning a 73K SF events space in a void left behind by Saks in Brookfield Place.
“Manhattan is becoming a larger market in terms of availability. Tenants are taking less space each quarter, per employee,” Caggiano said. “When you think about that it is quite extraordinary … The fact that we are adding more and tenants are taking less, you think you would see a lot more availability.”
Still, there are a number of large blocks of space seeking tenants. Availabilities of 100K SF or more were listed in buildings including 625 Madison Ave., 135 West 50th St., 375 Park Ave. and 245 Park Ave. in the first quarter, according to Colliers. Wells Fargo, which bought an office condominium at 30 Hudson Yards in 2015, is planning to leave 375 Park Ave. by the end of the year when its new space becomes available.
As more and more tenants seek new buildings, office availability across the borough could be forced up.
“The availability of new construction is attracting certain segment of the leasing market,” Savills’ Marans said. “The flip side is the tenants who are moving to the new constructions are leaving behind large vacant space in buildings, and owners are forced to heavily invest and renovate those assets.”
The other major factor driving the strength of the market is landlords’ willingness to offer incentive packages to lock down leases.
“Landlords understand to incent a tenant to their building, they have to differentiate themselves, one of those is through incentives packages,” he said. "The true standouts are offering attractive amenities within those buildings."
For the past year, landlords have been doling out increasingly generous tenant improvement allowances and free rent deals, and some have predicted that landlords will eventually have to start cutting their asking prices rather than relying on incentive deals.
And while some worry about the city’s dependence on coworking — and how exposed the market would be in a downturn — Marans said New York City would weather any dip well.
“Coworking has not saturated the New York market to the same degree that it has in London and several other global cities,” he said. “The way most of coworking operators build their space there is inherent value … in a worst-case scenario [like a recession], the landlords would still have access to the built-out spaces and they would be a position to release them to the tenants directly.”