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Weekly Market Report - October 10, 2023


Workplace mandates notched small gains, but face Covid-19 and economic uncertainty

Office landlords in major cities have seen their best occupancy numbers since the pandemic began, but the gains are short-lived as return-to-office mandates become more challenging. The average occupancy rate in 10 cities reached 50.4 percent of 2019 levels for the week ending on September 20. Major companies like Meta, Amazon, and JPMorgan Chase are pushing for more employees to return to the office, but they are not enforcing these mandates, leaving office spaces desolate. Occupancy rates are also facing labor shortages, commute issues, and the possibility of a recession. Covid-19 cases are increasing across the country, and negative perceptions of homelessness and crime in downtown areas can deter workers. As a post-Labor Day surge fails to materialize, office owners are left with the burden. A revised study estimates that New York's offices will lose 44% of their pre-pandemic value by 2029.


New York's leasing market has been notably weak this summer, with a 31% decrease in leases signed in Manhattan in the third quarter, according to Savills data. Availability increased by over a full percentage point from last year to reach 19.6%, while sublease availability declined significantly, falling 1 million SF from last quarter to 20.6 million SF. This comes as New York landlords, brokers, and tenants closely watch how return-to-office mandates will impact leasing in the city. Major city employers like Facebook, Amazon, and Google have enacted rules around office presence, which are seen as a possible boost for the sector. However, issues like rumored big blocks of sublease space soon to hit the market and the fallout of WeWork's possible demise are likely to dominate the rest of the year. Colliers data also indicates a slip in leasing from last year, with total volume 11.8% below Manhattan's five-year rolling average. Rent in the quarter slipped slightly to $75.28 per SF. However, green shoots emerged in the form of market-moving leases, with the legal and financial services sectors accounting for over half of the deals. The drop in leasing aligns closely with the decrease in office-based employment, with many office leasing activity being expiration-driven rather than discretionary.


Analysis of New York’s top real estate news

Office leasing in Manhattan is up. That doesn’t mean landlords are breaking out the Champagne.

Manhattan's leasing activity increased by 26% in the third quarter, according to the report. However, availability remains at 19.4%, and there is no quick turnaround. The market will absorb the additional 43 million square feet of excess space, which is the size of the entire Financial District. Office attendance increased after Labor Day, but occupancy in major cities remains half of what it was in 2019. Wells Fargo is reportedly agreeing to pay $550 million for the retail space vacated by Neiman Marcus at 20 Hudson Yards. Related Companies spent $80 million building out the mall space for the now-bankrupt retailer, and it took three years to find a replacement. The developer was able to lock down a buyer who wants to convert a space into offices, even as others clamor for a chance to convert their office buildings into housing. More than two dozen billionaires on the Forbes 400 list derived most of their fortunes from real estate.


Vacancy increase expected at Midtown’s Worldwide Plaza

SL Green and RXR's debt on a Midtown office complex, Worldwide Plaza, has been watchlisted due to an upcoming lease rollover. The complex, which includes retail and residential space, has a $940 million loan and reported nearly full occupancy. However, the occupancy rate has an expiration date next year, making it difficult to maintain. The second-largest tenant, Cravath, Swaine & Moore, plans to move to newer digs in Hudson Yards next year. Japanese investment bank Nomura Holdings is also at risk of leaving its lease early, which expires in 2033 but can leave in 2027, the same year Worldwide Plaza's loan comes due. Fitch increased its "probability of default assumption" on the debt. The vacancy risk at Worldwide Plaza comes as office owners face a market in secular decline, with some commercial landlords championing the asset class and others accepting that properties will never recover. Vacancy rates continue to climb, and the subleasing market is not helping office landlords.


Report looks rosy thanks to handful of megadeals

Collier's office leasing report shows a 26% increase in leasing activity from the second quarter, with demand more than doubled in Lower Manhattan and a 43% growth in Midtown South. However, available office space remains at an all-time high of 19.4%. The report covers Lower Manhattan, Midtown, and Midtown South. Frank Wallach, the report's author, warns that no three-month period will turn things around, as the market will absorb the additional 43 million square feet of excess space. More than a fifth of the jump in leasing activity came from just two leases, and without them, leasing demand would have been flat. Midtown and Midtown South have been a bright spot for the leasing market due to the "flight to quality" - companies upgrading to better Class A space. Midtown South's availability hit an all-time high with an 18.6% jump, attributed to new construction coming on line. Lower Manhattan's leasing activity more than doubled quarter-over-quarter and is up by 16.2% in the past year.


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