Analysis: Lenders, investors see signs of life in New York’s office market

The asset class remains difficult to finance but leasing and visitation levels are slowly rising.

New York’s office sector is showing unexpected signs of life, with an uptick in leasing and visits that could be the start of a recovery for well-located, well-designed properties – and the potential for an increase in lending and investment activity.

According to December research from the Real Estate Board of New York, office visitation rates in October were about 70 percent of pre-pandemic totals for all properties. Visits to class A+ offices hit 74 percent in October, compared to 67 percent in September. Visits to A/A- and B/C buildings were at the 70 percent mark in October, also higher than what was seen in September, said Keith DeCoster, director of market data and policy at REBNY.

The analysis of location data in 350 Manhattan office buildings demonstrates a distinct improvement, DeCoster said. “While best-in-class buildings continue to capture the highest rates, gains in B/C buildings during the last several reporting periods suggests that businesses occupying a broad cross-section of the market are getting more employees back in the office – at least several days during the week.”

The shift in attitude is being seen on the ground as well in the leasing market, according to Michael Cohen, president of the Tri-State Region at Colliers. The Toronto-based advisory firm tracked leasing activity which paints a more nuanced picture of the city’s office market –  and could give rise to a new narrative for lenders and investors, he added.

Colliers found that office leasing activity was more than 2.5 million square feet in October, a substantial month-over-month increase, said Frank Wallach, executive managing director of research and business development at Colliers.

“As is always the case, a few large deals moved the needle. The Manhattan leasing market has always been driven by the sub-25,000 square foot tenants but in this case, more than half of the leasing volume was driven by four tenants of more than 100,000 square feet,” Wallach added.

Year to date, the market is still about one-sixth below the leasing volume seen in the same period last year. “To surpass 2022, we would need about eight million square feet of leasing volume in November-December 2023,” Wallach said. “Has that happened before? Yes. When did that happen? Pre-2020. But there are, as always, some large deals that could close in November and December.”

Shifting tides for class B

This uptick in leasing is a positive which could portend the potential for a good fourth quarter, particularly because a substantial amount of the activity seen was in class B office buildings, Cohen said.

“These properties are getting mercilessly trashed and yet someone seems to want to renew or relocate to B buildings,” Cohen said. “The other trend we are seeing is that if leasing velocity continues to grow and distress continues to knock out more properties from the pool of availabilities, you begin to set the stage for a recovery.

“Considering how lousy things are, that’s my optimistic prediction.”

Within the class B market, there was more than a million square feet of leasing seen in October, the first time Colliers has seen this phenomenon since 2019. “Many people fail to realize that flight to quality is an overused and hackneyed phrase, but it applies within class as well as across class. For the tenants that want the B building for the price point, aesthetic and location, there is flight to quality within that class,” Cohen added.

Potential for change

The total availability in the Manhattan market as of October 31 was about 96 million square feet. Wallach noted the 100 million square foot market represents a key psychological threshold for the market.

“We are not at 100 million, but we are getting dangerously close to that. For reference, around March 2020 and in the period following the Great Recession, we were hovering in the area of about 54 million square feet of total available space. That means the supply of available space has grown by around 80 percent over the past three years,” Wallach said.

While there is the potential for a change in perception around the office, this will only happen when the supply starts to dwindle, Cohen said.

“That will not just be a result of leasing, it will be a result of folks taking buildings out of supply for other purposes. The [planned residential conversion of the] Flatiron building grabs all of the headlines, but it is just the thin edge of the wedge. There are dozens of buildings like that out there where the owners are weighing this decision. You will see millions of square feet repurposed, just like we saw in the Financial District a generation ago.”