Q3 2022 Office Space Report: New York City
Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.
Manhattan’s commercial office market took off during the third quarter of 2022, undeterred by inflation and spurred by low unemployment numbers.
The borough of Manhattan’s 8.0% annual private sector job growth was higher than both the state of New York’s growth at 5.4% and the national growth at 4.4%.
Another contributing factor: Average asking rent rates cooled slightly, driven by several factors. These included fears of a recession in 2023 and numerous workers still preferring to socially distance themselves from the Manhattan crowds by working remotely.
What can potential real estate investors expect from the Big Apple?
Manhattan Overview and Submarkets
Becoming familiar with the density and diversity of Manhattan’s CRE markets can be a challenge to all but the most seasoned investors.
Manhattan’s office property market comprises 18 submarkets:
- The Midtown district comprises the Columbus Circle, Grand Central, Plaza District, Times Square, and United Nations Plaza submarkets.
- The Midtown South district is home to Chelsea, Gramercy Park, Greenwich Village, Hudson Square, Hudson Yards/Manhattan West, Murray Hill, Penn Plaza/Garment District, and Soho submarkets.
- The Downtown district includes City Hall, the Financial and Insurance Districts, Tribeca, and the World Trade Center submarkets.
Generally, the areas with lower inventory numbers also sported the lowest overall availability rates.
For example, Midtown’s United Nation Plaza submarket comprised 3,585,854 square feet of office space, with an overall availability rate of 6.0%.
On the other end of the spectrum, the Grand Central submarket’s office space inventory added up to 54,549,522 sq. ft., with an 18.2% availability rate.
Let’s take a closer look at how availability and location affected CRE office pricing during Q3 2022.
Manhattan Office Space Pricing Data
After almost a year of quarterly rent increases, Manhattan’s asking rent average cooled slightly, falling from $75.61 during Q2 2022 to $74.07 in Q3 2022.
- Other boroughs, including Midtown, Midtown South, and Downtown, also saw asking rent averages slide.
- This was the first time in almost two years, since Q4 2020, that quarterly asking rent decreases were recorded in all three major NYC markets.
Reasons for lower pricing included above-averaged priced, larger blocks of office space being leased and removed from inventory. This was seen in new and renovated Class A buildings.
Midtown South’s Class A buildings were the exception to this trend, with Greenwich Village taking first place with a 7.9% increase.
Office Rents Heat Up in Midtown South
Despite an overall cooling trend, not all 18 submarkets saw rent rates fall. A total of 10 submarkets, including four Midtown South submarkets and U.N. Plaza, recorded year-over-year increases.
Greenwich Village saw the highest percentage increase, driven by over 235,000 sq. ft. of above-average priced space at 770 Broadway leased by Mark Zuckerberg’s Meta. However, Facebook/Meta will be vacating other Manhattan premises in 2023 upon expiration of the leases.
Other trends within the Manhattan office leasing market: longer leases for global corporations.
Financial Leaders Opt For Longer Leases
Although 2020 and 2021 were years when new tenants opted for shorter lease terms, 2022 is seeing more interest in longer leases, especially from larger corporations. Many firms seeking bigger chunks of office space see current market conditions as ideal for locking in better lease rates.
The two largest lease deals for this quarter are examples, with KPMG’s 20-year lease at Two Manhattan West and Franklin Templeton’s 15-year lease at 1 Madison Avenue.
Most startups and smaller businesses prefer a more cautious approach, signing shorter-term leases and negotiating tenant improvement allowances when possible.
KPMG Leads Q3 Office Space Deals
Manhattan’s financial services, insurance, and real estate firms ( FIRE) led leasing with 47% share of activity. Tech/advertising/media/information services companies came in second place, representing a 21% share of demand.
- Global audit, tax, and advisory organization KPMG signed a lease for over 450,000 square feet, relocating its headquarters to Two Manhattan West at 435 W 31st Street.
- Over 5,000 KMPG staff will occupy 11 floors of the building.
Other news-making office leases for 247,000 to 347,000 square feet include Franklin Templeton Investments’ leasing of 347,474 square feet of office space in the 26-story, 1 Madison Avenue building. Tech firm Datadog also acquired a 331,000 sq. ft. combined lease renewal and expansion at 620 Eighth Avenue.
Office Space Development Begins to Reload
While several major developments were put on ice during 2020-2021 because of the arrival of the COVID pandemic, several commercial developers have given the green light to renewed construction or renovation. These include:
- The 10-story Hudson Arts Building at 220 11th Avenue, Chelsea. Developers have announced the building will be completed “on spec”.
- The historic 295 Fifth Avenue Building, currently undergoing a $150 million expansion and renovation.
However, some major projects still remain stalled. One billion-dollar example: Three Hudson Boulevard, a 56-story commercial skyscraper in Hudson Yards. The project remains on hold as of December 2022.
What’s Ahead for Manhattan in 2023?
Although some CRE reporters foresee a major drop in office space pricing because of the post-COVID “new normal”, with more workers going remote or hybrid, not all of Manhattan’s office space will suffer.
Business professors at NYU and Columbia University are predicting office space rents to decline by as much as 39% in the next eight years, which would be a multi-billion valuation drop for NYC office properties.
However, the predictions for Class A buildings were more positive, as they were described as “somewhat buffered against the downward trend”.
Here are some final insights to consider.
Takeaways for Manhattan Office Space Investors
No matter what type of office space you’re considering for your next investment, Manhattan remains one of the nation’s toughest, most challenging markets.
Factors that may affect 2023 CRE prices include the possible arrival of a recession and whether the COVID pandemic will be declared officially over.
Frank Sinatra’s view of New York may be yours, too: “If I can make it there, I’ll make it anywhere.” Like anywhere else, careful due diligence and choosing the right broker will help patient investors succeed.
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