City brokers are braced for a torrent of “biblical proportions” as the office leasing market fights the effects of the enforced pause brought about by COVID-19.
Space-eating giants are dumping hundreds of thousands of square feet back on the market as Manhattan’s office leasing sector buckles under the weight of the coronavirus pandemic.
Emblem Health has already released 163,000 s/f for sublease at 55 Water Street and First Republic Bank is offering 151,000 s/f at 410 Tenth Avenue as the sector braces for more to come.
Two new second quarter reports show that the supply of sublet space now accounts for more than one quarter of total available office space in Manhattan and, if the downturn follows historic norms, this could double by the end of the year.
“In the last two market-wide downturns, sublease space accounted for as much as 44 percent of all available space. It is likely that more will hit the market in coming quarters, leading to a further softening in leasing conditions,” said the new report from Savills.
According to Newmark Knight Frank, 521,525 s/f of sublease space has been added to the market since March and another 1.2 million s/f is expected to arrive “imminently.”
Co-working companies also handed back nearly 450,000 s/f to their landlords during the quarter – much of it in the Flatiron District – helping push Manhattan’s availability rate up to 11.9 percent.
The experts at Savills say this glut of sublease space will put pressure on landlords who, so far, have been holding tight on rents, keeping the Manhattan average at $82.86 psf, down just 1.3 percent from the first quarter.
However, Savills noted, “As tenants leverage highly discounted sublease pricing, we anticipate significant pressure on direct taking rents for the balance of 2020.”
According to NKF, the Downtown office market has held up best since the outbreak of the virus, claiming over 71 percent of all leases signed during the second quarter. Highlights included the SEC’s 241,000 s/f lease at 100 Pearl and a 12-year, 85,000 s/f lease signed by insurance startup Policy Genius at 32 Old Slip.
A flurry of short-term renewals and the Durst Organization’s 232,000 s/f deal with TikTok kept Midtown on somewhat solid footing during the quarter, with asking rents at $85.76 psf and availability stable at 12.5 percent.
But in the new-tech honey pot Midtown South market, rents fell for the first time in over a year. The Meatpacking District saw over $9 psf shaved off first quarter rents and availability jumped to 10.1 percent as WeWork and MDC Partners each dumped 50,000 s/f into the sublease market.
In all, co-working and flex office providers unable to collect rent returned 391,125 s/f of space to Midtown South landlords, according to NKF. The biggest lease signed in the submarket was the 40,000 s/f at 60-74 Gransevoort Street taken by Match Group, a holding company that owns online dating brands including Tinder and OkCupid.
Since the onset of the pandemic, New York City has lost 144,400 office-using jobs, according to NKF’s executive vice chairman Brian Waterman, who said, “As anticipated, we’re beginning to see how the COVID pandemic put a pause on the office market sector during this quarter.”
However, looking at the glass-half-full, Waterman added, “There were a few bright spots where for the third consecutive quarter a tech company signed space for their NYC HQ and several other area tenants signed short-term renewals to preserve flexibility as they strategically plan to re-engage the office market post-pandemic.”
The market is also eagerly awaiting the much- talked-about Facebook lease for a rumored 740,000 s/f in Vornado’s redeveloped former James A. Farley Post Office building.
Meanwhile, Savills expects “uncertainty and speculation” to prevail as tenants look to leverage their advantage on the market. “With cost control imperative across many organizations, sublease space will drive supply-side increases through the remainder of the year,” said the report.
“Many real estate decisions will remain on pandemic pause until COVID-19 uncertainty fog clears.”
Ruth Colp-Haber, a veteran of the sublease sector and president at CEO at Wharton Property Advisors, also paints a bleak forecast.
“Members of the industry should prepare for an unprecedented flood of sublet space of Biblical proportions in quantity at significant price reductions,” said Haber.
“The situation will develop over the coming months, throughout the summer as companies return to their offices and assess their space needs.
“Unlike major NYC landlords , these tenants turned sublandlords will be looking to slash overhead by disposing of space at whatever price they can get. Their goals are short term, unlike the major NYC real estate firms Accordingly they are not concerned about long term rental rates and brand preservation. These new sublandlords need cash and need it quickly. “
