A family office's 10-year signing at 9 West 57th Street, originally reported at a record $327.50 per square foot, has raised eyebrows across the CRE community in New York City. So much so that JLL now thinks that $300-plus deals could become the new norm for Gotham's office sector, according to a new report from the CRE brokerage.
When David Kleiner, vice chairman in JLL's New York office, first heard the news of the massive deal at Soloviev Group's 50-story office tower, he called it "somewhat jaw-dropping." However, he did note that it's a reflection of how expensive the environment is today in the post-pandemic world, with surging inflation impacting construction and financing costs, along with constrained supply.
"There's a limited supply at the very top end of the market, so tenants are competing for it and willing to pay up for it," Kleiner told GlobeSt.
"The office space is not just the line item expense anymore. It's now part of their talent strategy and overall business performance. So, when you compare these occupancy costs to labor costs, paying more for the right office space, it makes sense if it helps to track and keep employees and support productivity."
More of these deals in the $300 per square foot range will come, at least in the eyes of Kleiner, with the highest quality buildings getting the most exposure to this threshold.
"We will continue to see these new construction, highly amenitized buildings, properties where landlords have invested a significant amount of capital," he predicted.
NYC Areas to Watch for $300 Per SF Deals
Some areas in New York will come at a higher premium than others. He listed some markets with low vacancy rates, including Manhattan's Park Avenue and Hudson Yards, as ones in particular that could see rents in the $300-plus range.
"If you're a tenant looking for space in one of those sub-markets, and looking at some of the better product, the trophy product in those markets, you're going to continue to pay up for it," Kleiner said.
He also lists the World Trade Center complex as another area that could command high rates, along with Midtown South, which Kleiner notes has seen almost a million square feet of absorption alone so far this year.
Quality Over All Else
While certain New York areas will command more than others — Kleiner said it's less about the location in most cases — and more about the product quality. That's driving tenants above all.
Even having a reputable local landlord with multiple buildings in the city, like Vornado or SL Green, isn't a deal-breaker.
"They want new construction, they want great light and views, they want buildings that have been highly renovated [and] highly amenitized," Kleiner said of today's office tenant.
"I think you could be an owner of property in New York and have one or two buildings [and still find success because] they're the best buildings in New York City, versus the landlord in New York who has 15 or 20 buildings."
The flight to quality trend hasn't been New York-specific — but something that has been the case nationally since the pandemic. Another that has picked up traction is smaller, boutique offices.
More Expansions and Larger Deals Emerging
However, Kleiner has noticed a shift recently: deal size has been increasing.
"What we're seeing now is companies focus on higher quality space that brings everyone together, supports recruiting, supports retention and in a lot of cases, firms are consolidating into fewer but better buildings than locking in longer-term deals," he said.
Also, that leads to Kleiner's next new trend: expansions are becoming more prevalent today. According to Kleiner, these types of deals have now "probably" doubled from the pace seen a couple of years ago, as availability becomes more constrained for New York office product.
"I think that's partially because a few years ago, tenants had a lot more relocation choices, whereas today, the higher quality options are getting tighter in the most desirable locations, he noted.
"So instead of taking the risk, moving and potentially losing access to good space, companies are choosing to expand within their current buildings, which is always less disruptive [and] gives them continuity.
However, he does think that limited options on the market contribute to a problem, with some tenants not being able to expand in their buildings due to availability getting tighter.
In fact, JLL's first-quarter Manhattan office report found that vacancy dropped by 220 basis points year-over-year to 13.5 percent. The CRE brokerage even admitted that the tenants were forced to concede on the quality of their location.
While availability is becoming a challenge, New York's office sector will continue, at least in the short term, to be defined by its premium product. How many of these $300-plus square foot deals we see over the next 12-24 months remains a question — but odds are more will come after Soloviev Group set the new bar.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.