Optimism Grows for Soft Landing in Manhattan's Office Market

Manhattan’s office market navigated a fog of uncertainty in 2023 that stifled sales transactions and saw overall leasing activity drop to 21.7M SF, a 20% decrease from the volume total in 2022.

Office leasing volume surged to 6M SF in Manhattan in the fourth quarter of 2023, making it the strongest quarter of the year, in a clear signal that the sector is stabilizing and we won’t be talking about another 20% drop in activity in 2024.

The year ended with the kind of shot in the arm the office market has desperately needed, a thunderclap of a mega-deal in which the Paul, Weiss law firm inked a 765K SF lease to relocate its offices to 1345 Avenue of the Americas.

JLL is anticipating that 2024 will begin with an equally robust start. “We know there are other big deals in the works that haven’t closed yet,” Andrew Lim, JLL’s New York research director, told GlobeSt.com

The legal sector has been a frontrunner in office leasing activity in Manhattan in 2023, with law firm leasing making up 17.2% of all office leasing, according to JLL’s Q4 market report. Financial services firms now are in the market looking for more space, Lim said.

“A lot of the big banks were too conservative in estimating their space needs during the pandemic,” he said. “As we’ve come out of the pandemic, financial services companies have done well, they’ve continue to hire and they realize they need more space.”

“In general, they’re looking to take up [more] space where they already are,” Lim added. “Bank of America has expanded around Bryant Park and several financial services companies have renewed on Park Avenue.”

Office availability has plateaued in H2 2023 at 18.2%, a record level, and overall office vacancy increased by 50 bps to 17% in Q4.

However, JLL notes that the vacancy rate was bumped up by the delivery of two large office redevelopments, Penn 2 and One Madison, encompassing a total of 2.4M SF, with both properties not fully leased upon completion.

A harbinger of better days to come, in terms of the supply and demand equation, is the rapidly shrinking development pipeline in the Manhattan office sector. JLL reports there is now less than 7.2M SF under development, with a majority of this space already leased or expected to be owner-occupied.

“Because of the flight to quality, new construction has been the hottest segment in the market, but soon there will be so little new supply at that end of the market, you’ll start to see a trickle-down effect,” Lim told us.

The trickle-down already has started in Midtown, where there is a shortage of large available footage of prime office space.

“A lot of the buildings on Park Avenue that are seeing $100 [per square foot] rents are not glitzy new Class A buildings like Hudson Yards, but they’re the next best thing,” he said. “It’s not just quality, it’s location.”

“We expect to see little new construction coming online in the next four or five years, so there are going to be more tenants in competition for the best available spaces,” Lim said. “There are a lot of silver linings to the development pipeline being much smaller than it was.”

As the interest rate hikes that made the cost of new construction untenable for the foreseeable future begin to come down, with the Fed projecting three rate cuts towards the end of 2024, Lim suggested this may spawn a wave of investment in existing buildings for upgrades that will let them compete with diminishing newly built Class A space.

“In the first half of 2023, with regional bank failures and rising interest rates without an end in sight, we were really bogged down with macro-economic concerns,” Lim said. “Now, going into 2024 with a sense of where interest rates are going to go, we can be cautiously optimistic about a soft landing.”

What happens to the bottom half of Manhattan’s office market, still languishing with high vacancy rates as rents average around $81 per square foot?

“What we’re seeing is that commodity buildings are starting to seriously consider repricing rents by 10% or 15%,” Lim told us. “They’re not going to sit on the space waiting for $80, when they can make a deal at a lower price.”