They Could Only Resist NYC's Premium Office Space For So Long

Premium office space in urban cores in many established cities worldwide is proving resilient amid the pandemic, retaining a high demand from tenants compared to less central or suburban locations, according to a new JLL report.

One Vanderbilt, a 93-story skyscraper in New York City, was completed in late 2020. At the start of 2022, it has almost no spare office space for rent.

A similar pull to buildings that tout best-in-class facilities has been seen across the US’ biggest city, including other relatively new projects like 425 Park and 50 Hudson Yards, as companies upgrade their offices as part of an effort to lure employees away from their work-from-home lives.

In fact, office rents in Midtown—where One Vanderbilt is located—last year caught up with Hong Kong’s main business district as the market most coveted by tenants, with rents averaging $261 per square foot, according to JLL’s Premium Office Rent Tracker research.

“We learned a lot during COVID-19. Technology may allow us to work from home, but it also isolates us and blurs the lines of home and work. There’s nothing like the energy of the office to bring colleagues together, which is why corporates are willing to pay a premium for that space,” Peter Riguardi, chairman and president of JLL’s New York Tri-State regions, said in the report.

‘Flight to Quality’

David Vincent, an investment specialist at real estate investment platform Cadre, tells GlobeSt.com that many companies are still trying to figure out what the future state of office will look like, though recent surveys have signaled that most don’t plan on making meaningful cuts to the amount of office space they use—even with hybrid or flexible on-location requirements for employees.

“With that in mind, we continue to see a ‘flight to quality’ in the office space,” he says. “Companies eager to recruit staff back to in-person work are paying top dollar in some markets for newer, high-quality spaces with amenities like more spacious work areas, fitness areas, expanding dining offerings and meeting rooms designed to better integrate a mix of in-person and remote participants. 

“Some are relocating to premier markets or more prestigious locations within the same region. This is a cyclical trend, where companies that can afford to upgrade do so in soft office markets.”

He said that the rebound in the urban apartment market, especially in a market like New York City, is not terribly surprising.

“New York City offers a truly unique living experience that remains incredibly attractive to a large number of younger workers who can enjoy a short commute, when they need to be in the office, combined with an unparalleled entertainment, restaurant and bar scene. Being able to bring work and life together in such a dynamic environment is a powerful draw for many people.”

Bigger Floor Space, Strong Amenities Ideal

Eli Randel, Chief Strategy Officer at Crexi, tells GlobeSt.com that following a period of transition and limbo during the first 12 to 18 months of the pandemic, most central business districts are seeing a very strong rebound in tenant demand specifically for premium office space.

“As corporate businesses slowly call their workforce back to the office, many are choosing bigger floor plans for spacing and flexibility and amenity rich space to make the office experience attractive to their workforce,” Randel said. “As a result, premium office rents in urban markets increased by 30% or more from 2020 to 2021. On the heels of increased tenant demand and rental rate growth is an increase in investor demand with buyer activity growing by 38% in those markets from 2020 to 2021.”

Premium Class A office space, especially in New York City, has proven resilient over the past two years, Christopher Okada, CEO, Okada & Company, agrees.

“Many large companies seeking office space are drawn to these urban towers given their desirable locations, well-thought-out designs, and expansive amenity offerings,” he tells GlobeSt.com.

“Similarly, we are seeing increasing demand for Class B office space, especially in buildings offering turnkey spaces, renovated interiors, and within walking distance to public transit, cultural experiences, and dining and entertainment venues. 

“Midtown South is experiencing significant activity for its mix of best-in-class buildings that are attracting companies such as Facebook, Google, and Amazon. As a result, there is greater demand for office space in this area.”

‘War for Talent’ Also Helping Apt Rents

New York is set to continue to see strong demand, JLL’s Riguardi says. 

“The growing war for talent, a flight to quality, and an infrastructure bill expected to boost transit infrastructure around Penn Station and airports, will make the city even more desirable, even as some employees clamor for more flexibility in where they work,” he said.

And it’s not just office space that’s springing back. Apartment leasing has also surged quite a bit in New York City—signifying a considerable return to the urban core, says Phil Ryan, JLL’s US Office Research Director.

According to recent data, rents in New York City are up 22.8 percent over the year as the market corrects after seeing rents drop sharply in 2020.

“As things have come back and restrictions have gone away, there is a large segment of the population, particularly younger workers, who still want that amenity-rich lifestyle,” Ryan says. “Dense cities like New York provide them with fantastic public transit and an abundance of cultural amenities and nightlife. It just exists naturally at a greater scale in urban cores.”