A booming jobs market and dearth of new office development has pushed Manhattan office rents to new highs.
The borough’s asking rent average reached a $77.82 psf, up 4.9 percent on this time last year, according to Colliers’ half yearly office leasing report.
Leasing during the first half of 2019 was 20.26 million square feet, a 13 percent increase year-over-year.
“Similar to 2018, a healthy job market and steady economic growth has led to strong leasing activity in the first half of the year. Overall availability remains near market equilibrium while pockets of Manhattan were at their lowest post-recession availability on record,” said David Amsterdam, Colliers’ president, Investments and Eastern Region.
In its report, JLL found that while finance tenants have remained the top leasers in terms of square footage (17 percent share), the creative industries, in particular co-working, advertising, media and entertainment and tech, accounted for 39 percent of leases so far this year.
That figure is expected to expand as steady demand for class A space has led to a vacancy rate of 7.2 percent, matching a post-recessionary low.
Craig Leibowitz, director of research in New York at JLL, noted, “We have a record level of total office using jobs.”
The report by JLL noted that, despite new developments in Midtown West and Lower Manhattan, the market has remained undeserved overall due to the “advanced age” of much of the office inventory, compared to new competitors in the borough as well as in other global cities.
JLL believes new and fully renovated buildings are the most likely to do very well as are properties in mixed-use neighborhoods like Midtown West and Midtown South.
“Limited supply relief” is anticipated in the next two years in these two districts and beyond. Downtown could also experience an uptick in interest, JLL reported, “as tenants recognize its ease of accessibility and cost competitiveness” compared with the two aforementioned communities.
Throughout the borough, nearly 30 leases greater than 100,000 s/f were signed by mid-year, with more than half of those being signed in the second quarter. They include relocation commitments from AIG (320,745 s/f), Justworks (264,938 s/f) and BMO Capital Markets (215,056 s/f). The largest transactions were by McCann WorldGroup (450,000 s/f), EmblemHealth (440,000 s/f) and AIG.
Asking rents rose in 11 of Manhattan’s 18 submarkets since the second half of 2018 and, according to the Savills 2Q report, concessions such as tenant improvement allowances for longterm Class A tenants have increased 7.5 percent year over year, averaging $105.21 psf with free rent hovering around 12 months.
Savills reported a 6.5 percent hike in Class A asking rents and noted that the difference between Class A asking and actual rents stands at six percent ($90.86 psf asking versus $85.36 psf starting rents).
Jeffrey Peck, vice chairman of Savills, believes this could be a sign of a softening market and predicts incentives for tenants are likely to grow, if asking rents don’t start coming down.
“It’s an immaterial barometer,” Peck said. “What the market needs to look at is what is the taking rent.”
Peck said he believes the commercial market needs to learn from the changing retail landscape and be willing to ask for less.
As to how much an owner should be willing to adjust a price, “We don’t know,” said Peck. “The market will dictate.”
JLL’s Leibowitz, meanwhile, called concessions to tenants a new normal in terms of negotiations.
“It could to some degree be potential capital market play, since they don’t directly impact a building’s potential recapitalization in terms of equity or debt,” he said.
While concessions do appear to be at a high, Leibowitz noted that landlords, in order to remain competitive with new developments, need to invest in their properties one way or another.
“This is an older market and they have to compete on pricing,” said Leibowitz. “There are still winners and losers based on the quality of the building, how close you are to public transportation and amenities.”