Manhattan office landlords are growing increasingly dependent on concessions in spite of rental rates hovering near record levels.
According to Savills Studley’s 2017 Effective Rent Index, the borough’s Midtown and Downtown office markets registered increases in concessions in 2016. For the year, incentives in Midtown rose by 10.2 percent to $167.41. Meanwhile, Lower Manhattan posted a two percent increase to $104.
This is in spite of modest increases in tenant effective rents, which is defined as what tenants truly pay for Class A office spaces. During the year, tenant effective rents in Midtown rose by 1.1 percent while Downtown posted a 1.3 percent increase.
Keith DeCoster, Savills Studley’s director of U.S. real estate analytics, pointed to a common thread between high-cost locations like Manhattan, San Francisco and Washington DC.
He said that the areas face price drops as tenants push back against high rents, adding that “landlords kept rents elevated only by boosting concession packages.”
“We expect these markets to trend down as we see more price resistance and potentially a slight decrease in 2017. Tenants continue to stick to a strict regimen of space densification, whether it is the shrinking of Manhattan law firms and banks, the federal government radically reducing the space allocated per employee in D.C., or tech companies dialing back on office space in San Francisco.”
Meanwhile, Gerald Prager, a senior vice president at Savills Studley, said that increases in tenant effective rents are becoming less likely in these areas.
“It’s safe to say that the days of continued tenant effective rent increases in these metros are coming to a close,” Prager said. “In the upper echelon of the market, landlord favorability has peaked for this cycle and we anticipate the market becoming more and more favorable to tenants over the course of 2017.”
In New York, the use of concessions is stronger with institutional owners, which in turn puts pressure on their competitors.
“Given the significant rise in New York City’s real estate prices, we’ve seen an influx of institutional owners, who are more apt to offer greater concessions. These investors have a defined period to sell and want to raise NOI as quickly as possible. They will spend more in the short term to get materially higher value in the long term. In turn, other landlords feel pressured to compete in order to attract tenants to their buildings,” said Greg Kraut, who left Avsion Young in January to become a managing partner at development firm K Property Group.
However, not all office landlords are uniform in their view of concessions. “We don’t see a huge across the board jump in concessions at this point,” Nelson Mills, CEO of Columbia Property Trust, said during a recent earnings call. “We are holding pretty firmly on the TIS (tenant improvements). We have seen a couple of examples of it elsewhere with other landlords but I don’t see it as a trend in New York.”
SL Green has taken it a step further. During an earnings call in April, the firm said that it is very unlikely to offer incentives to potential tenants. Marc Holliday, the firm’s CEO, said: “Our philosophy is to… hold the line on tenant concessions.”