After a sluggish start to the year, the Manhattan office market has experienced a strong rebound. In the second quarter, more than 10 million square feet of space was leased, the highest quarterly total since 2014, pushing year-to-date leasing activity to just over 17 million square feet. At mid-year 2018, there were 17 new leases exceeding 100,000 square feet and 35 new leases of more than 50,000 square feet.
Although the economy has been at a peak for an unusually long time, the Manhattan office market has reached new highs. This presents an interesting exception to the norm, where real estate typically lags the economy, and it is good news for the market.
Market Drivers
While demand has come from a variety of sectors, the most recent top occupiers have come from the FIRE (financial services, insurance, and real estate), TAMI (technology, advertising, media and information), law firm and coworking sectors.
Early in the year, the FIRE sector dominated large-block transactions. Examples include JPMorgan Chase’s 420,000-square-foot lease at the newly renovated 390 Madison Ave., and Bank of America Corp.’s 343,000-square-foot lease at 1100 Avenue of the Americas and 127,000-square-foot lease at 1114 Avenue of the Americas. This level of expansion from the FIRE sector hasn’t been seen in some time, but it speaks to the diversity of existing tenants in the Manhattan market.
Danny Mangru
Research Manager, Transwestern
More recently, the TAMI and law firm sectors heated up and have dominated big-block transactions. Some of the most notable deals include Latham & Watkins LLP inking a 407,000-square-foot lease at 1271 Avenue of the Americas; Facebook Inc. expanding by 320,000 square feet, taking the former J.Crew Group Inc. space at 770 Broadway; and Discovery Inc. signing a 360,000-square-foot lease at 230 Park Avenue South.
Whether deals like this will turn into a long-term trend is unknown, but for now it has certainly revived the TAMI sector.
And then there is the coworking sector, which continues to eat up space across both Midtown and Midtown South, with WeWork and Knotel signing 11 new leases so far in 2018, totaling almost 400,000 square feet. All signs point to continued robust activity through the remainder of the year.
To complement the record-high leasing volume, Manhattan’s average asking rent is sitting at an all-time high of $74.36 per square foot, up 3 percent year over year. It’s been holding relatively steady, primarily due to the market’s wide range of quality, coupled with a mix of old and new product.
Particularly notable is that Midtown South’s average asking rent has steadily inched closer to that of Midtown due to the addition of new product over the past several years. As of the second quarter of 2018, the gap between the two markets is only $3.36 per square foot. The shrinking spread is encouraging, as Midtown South has historically lagged behind the most expensive areas of Manhattan.
Tempered Enthusiasm
While some market statistics, like average asking rents, point to a healthy market, the net absorption rate tells a different story. Despite recording historic leasing volume during the sedond quarter, net absorption still stands at negative 1.4 million square feet through the second quarter of 2018.
The reason is twofold: First, 25 blocks of space exceeding 100,000 square feet were added to the market in that time. Second, eight large-block transactions recorded this year, accounting for approximately 3 million square feet, were either preleased (Pfizer’s nearly 800,000-square-foot lease at Tishman Speyer’s Spiral at 66 Hudson Blvd.) or not officially on the market (the leases by Facebook and Discovery Inc. mentioned earlier).
In both cases, these and other deals like them didn’t affect the net absorption figure. It’s a phenomenon that doesn’t occur in every market, but an important consideration.
Meanwhile, with all those large blocks of space trading hands, Manhattan’s availability rate inched up to 11.4 percent, the highest recorded since 2014. Perhaps more revealing of the counterforces at play, the sublet availability rate also has been quietly creeping up to 2.2 percent thanks to the addition of nine blocks of sublet space over 100,000 square feet so far in 2018. The majority of the sublet space additions have impacted areas such as Hudson Square in Midtown South and the World Trade Center area.
Overall, the Manhattan market remains healthy and market fundamentals should remain strong through the end of the year. Over the course of the next six to 18 months, the biggest variable will be several 100,000-plus-square-foot blocks that will hit the market, stemming from new construction and shadow space left behind from tenant vacancies.
Though preleasing may offset some of the new construction inventory, the market will need to see continued strong leasing activity to absorb the added supply. And that’s just the type of challenge the Manhattan real estate market loves.