Downtown's availability rate grew by 0.2 pp to a record-high 20.4%

Concern About Committing to Larger Spaces

Rob Gilman, co-head of the Real Estate Group at Anchin, tells GlobeSt.com that between employees still wanting to work remotely and a fear of a recession, companies with expiring leases are taking significantly less space than before.

"We have seen a reduction in space being leased on renewals while employees are still working remotely but the added concern of a recession has cut the renewal space even more," he said.

"I see companies saying that if things turnaround they will take more space in future, even if not in same building. They are too concerned on current exposure to commit to larger spaces."

Oft-Promised Office Recovery Keeps Fading

Alex Snyder, portfolio manager, real estate securities, CenterSquare Investment Management, tells GlobeSt.com that the office recovery "never really took hold. Not the one that was supposed to happen post vaccine. Not the one that was supposed to happen post Delta. Or post Omicron. Or now, post Labor Day some two and a half years later.

"The anchor keeping the office ship from rising with the tide has varied in form over time.

"First it was the fears over resurging variations of the virus. Then it was the strength of the labor market, as most employees didn't want to go back to the office five days a week, considering commuting to largely be a waste of time when jammies and a view of your backyard will suffice.

"Yet in Q3 2022, we finally saw some decent hope sprout up for office. As we swam through a somewhat normal feeling during summer, plans were made to finally establish a routine of coming back into the office, even if just for three days a week.

"Tours and leasing picked up. Landlords rejoiced. But this time the party was halted because inflation stayed hot, and the Federal Reserve 'called the cops.' It kept raising rates to soften demand and the stock market plummeted as Jay Powell intentionally put his boot down on demand employers took notice.

"Recession fears mounted. Hiring started freezing at many companies. Taking on new costs suddenly seemed unwise. Leasing new office space for a decade became daunting. And once again the oft promised office recovery faded before drawing its first deep breath."

Office vacancy remains historically elevated more than two years after the pandemic hit the US, reported Yardi's CommercialEdge.

Manhattan offices currently rent for more than multifamily per square foot, however, the gap is down from a 44% gap pre-pandemic and will be dependent on the Hybrid work models and economic conditions.

Hybrid Model Alive in Well – Especially Elsewhere

David Vincent, investment specialist, Cadre, tells GlobeSt.com that it's "clear" from the data that the NYC office market is still reeling from the pandemic.

Last week, Kastle Systems reported only about 47% of workers on average went into the office and, depending on the day, the range was from 26% to 57%.

"Though NYC is still working through office vacancies and a lackluster leasing environment, we are seeing significantly different trends in other markets," Vincent said.

In Austin, for example, its range was 44% to 72% of workers in the office.

"This highlights that the hybrid model is alive and well for many companies and many of the high growth markets that benefited from the population migration during the pandemic are proving more resilient than the nation as a whole," he said.

Workers Seek Lower Taxes, Less Crime

Sara Knippa, a research associate at Green Street, tells GlobeSt.com that the resiliency of NYC is being tested coming out of the pandemic-induced recession.

"The market was one of the hardest to be hit by Covid-related lockdowns and urban exodus resulting in business closures and company relocations (e.g., Elliot Management)," Knippa said.

"Furthermore, WFH has given workers the option to relocate to lower-tax states with less crime. Economic growth is lagging large coastal peers and employment has still not fully recovered in the market.

"A troubling fiscal health environment continues at the state and market level as the severe MTA budget crisis and mounting debt burdens raise concern. NYC's already high tax rates may rise in the near term to alleviate the poor fiscal climate."

Manhattan at a Tipping Point

Petra Durnin, head of market analytics at Raise Commercial Real Estate, tells GlobeSt.com, "Manhattan is at a tipping point with leasing activity being dominated by traditional companies due to younger industries making bolder decisions about large space commitments, especially in Midtown South.

"As companies further reassess office space strategies, flex spaces are becoming more integrated in real estate portfolios as evidenced by the near-capacity occupancy in many locations.

"Non-traditional companies in Midtown South don't appear to be taking a 'wait-and-see' approach when making decisions as proven by the large volume of leasing in this submarket. The flight-to-quality trend increased the average size of direct deals to 32,000 sf for Class A, from an historical average of 25,000 square feet.

Contrary to past cycles, Durnin said that Midtown South is attracting large companies in the tech, consulting, hedge fund, and creative sectors driven by new construction and extensive renovations of older assets.

Dining Choices a Preferred Amenity

Peter I. Reiter, partner at NYC real estate law firm Romer Debbas, tells GlobeSt.com that office leasing is strong in buildings where landlords have invested large sums of capital to upgrade with high end amenities and are partnering with popular chefs to have restaurants/cafes in the buildings for tenants.

One example is 277 Park Avenue, which has modernized its lobby entrance and will have a restaurant on Lexington Avenue.

"These upgrades had achieved strong rental activity at higher rents than seen in other office buildings without significant investments," Reiter said.