NYC Office Leasing Fails to Meet Expectations

There have been several signs that the office market in New York City was looking up: Anecdotal lease deals, office investment rebounding and the beginning of workers returning to the office. The first quarter stats, unfortunately, don’t show a recovery. According to the first quarter report from Colliers, Manhattan office leasing fell 11.6%, and office demand was 7.1% below Manhattan’s five-year rolling average and 6.9% below the ten-year average. 

According to the report, it isn’t odd to see a fourth quarter-to-first-quarter decrease in leasing activity. In fact, there has been a decrease from Q4 to Q1 for the last seven years, with an average decline of 17.5%. There were also several positive signs that demand for office space is returning to the market. Leasing volume increased 67.5% and average rents increased 2.6% year-over-year, although they still trail below the rate at the start of the pandemic, down 5.5%. 

FIRE industries, which include financial services, insurance and real estate, drove the leasing activity in the quarter, accounting for 36% of the activity. TAMI industries, on the other hand, accounted for the second most leases during the quarter at 23% of the market activity. 

While leasing activity was down for the quarter, the absorption rate began to move toward stabilization, helping to also steady the vacancy rate. In the first quarter, the absorption rate came in at a negative 0.57 million square feet, while absorption over the last 24 months totaled negative 39.43 million square feet. The availability rate reached 17.4% in February, then fell nominally in Q1 2022 to 17.3%. Quarter-over-quarter, the rate was unchanged. Overall, Manhattan has a long road ahead until it reaches full recovery. Since the start of the pandemic, available supply has increased by 73.2% since March 2020 to a total of 93.28 million square feet. 

While leasing activity was faulty in the first quarter, office investors weren’t deterred. Investment volume totaled $6.6 billion, a 1,000% increase year-over-year and making it the strongest start to the year since 2015. First quarter activity more than doubled 2020’s first quarter. Blackstone’s $2.8 billion partial-interest acquisition of 1 Manhattan West in a deal, and Google’s acquisition of St. John’s Terminal for $2 billion were among the top deals. 

One reason why investors might be bullish on office investment is the shrinking supply. New York City’s office construction pipeline is starting to contract. A new report from Commercial Edge has taken a close look at new construction starts in the last several years to forecast the trajectory of new supply. Since the beginning of 2021, developers have started new projects totaling a mere 2.1 million square feet, signaling a contraction in new construction activity, according to the report.