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Manhattan's office market experienced a significant increase in leasing activity in August, with companies leasing about 2.5 million square feet of space. However, leasing activity dropped by 25.6% year over year, with 17.4 million square feet of Manhattan office space leased so far this year, putting 2023 on pace to fall 10.5% below the total for 2022. The borough's availability rate remained at 17.8%, with available office space growing by 78.4% since March 2020 to reach slightly over 96 million square feet. The average asking rent slightly increased, reaching $75.70 per square foot, the highest average since October 2020, but lower than the average of $79.47 per square foot from March 2020. Midtown South saw a record high of 771,000 square feet of space leased, with L'Oréal inking a 67,000-square-foot lease at 10 Hudson Yards. Downtown saw about 445,000 square feet of activity, with more than half of it coming from six-figure deals. While there were some signs of the office market stabilizing, the borough still faces a strong mismatch between supply and demand over three years since the start of the pandemic.
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Activity increased for fourth month to 2.5M sf, but RXR renewal claims lion’s share
Manhattan office landlords leased 2.5 million square feet in the borough last month, marking the fourth consecutive month of increased market activity. However, leasing activity fell by 26.6% year-over-year, with the borough on track for a 10.5% drop from 2022 to 2023. The vacancy rate remained at 17.8%, and 96 million square feet remain available in Manhattan. Midtown experienced the strongest leasing month, with 1.3 million square feet taken, with over half from a deal at Scott Rechler's property. Midtown South saw 771,000 square feet leased, while Downtown trailed behind at 445,000 square feet. The average asking rent for the fifth consecutive month increased, reaching $75.70 per square foot, the highest average since October 2020. However, the average asking rent in Midtown South reached $82.78 per square foot, a record for the neighborhood.
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Meta has implemented a return-to-office mandate, requiring employees to work from the company's physical locations at least three days a week. The change was announced in June and will not affect Meta's current roster of remote workers. However, any employee assigned to an office will need to comply with the rules starting this week. Meta believes distributed work will continue to be important in the future, particularly as technology improves. The company first extended its remote-work policy to all full-time employees in June 2021. However, tech giants like Amazon and Google parent Alphabet have reversed course on previous remote work policies, calling for staffers to return to physical offices at least three days a week or face consequences. Meta CEO Mark Zuckerberg hinted at updating the policy in March after an internal analysis showed that engineers who work in person "get more done."
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Flexible schedule options and certain benefits may help retain employees amid the transition to more in-person work.
A report from Resume Builder indicates that 90% of companies plan to implement return-to-office (RTO) policies by the end of 2024. Most business decision-makers track employees to ensure in-person attendance, and 28% would threaten to fire employees who don't follow new mandates. However, the job market is constantly changing, and businesses must consider the potential backlash against major employers who have forced employees back to the office. Only 2% of respondents said their company never plans to require employees to work in-person, while 51% currently require some or all employees to work in-person. Only 4% never plan to have a physical location for employees. While companies can threaten to fire employees over RTO policies, they should consider the strong candidate market in many industries. Balancing workplace flexibility with the cultural benefits of in-person work is crucial for attracting and retaining talent.
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Rising rates, falling occupancy and new carbon taxes hit building owners
Cities across the U.S. are imposing new carbon emissions taxes on buildings that don't meet new requirements. In New York City, landlords of large buildings will face a $268 fine for every ton of carbon dioxide emitted beyond certain limits. This tax could add up to more than $50 million during the first five-year enforcement period, which begins in 2024. Fines for the same buildings could jump to $214 million if their landlords don't meet the city's emissions standards during the period between 2030 and 2034. The Real Estate Board of New York and engineering consulting firm Level Infrastructure said that more than 13,000 properties could face fines totaling about $900 million annually. Buildings are New York City's largest source of carbon emissions, which come from fossil fuels used to heat and provide air conditioning for them. More than a dozen local laws regulating buildings' carbon footprints have gone into effect since 2021 or will come online by 2030. The impact of the emissions laws initially will be small but will come on top of other, more costly problems faced by landlords. The 51-story skyscraper at 277 Park Ave. in Manhattan would cost just $1.3 million in fines in 2024. Shares of the three big landlords whose properties were analyzed by the Journal are trading at near historic lows.
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Canadian Imperial Bank of Commerce (CIBC) is de-emphasizing its US office real estate (CRE) business due to a weak earnings report. The bank reported net income of $45.5M in U.S. commercial banking and wealth management for Q2, down 62% from the same period last year. The increase was largely due to higher credit provisions, mainly in its office portfolio. Total provisions on impaired loans reached $351M, up $72.8M quarter-over-quarter for the bank. The bank's exposure to the US office sector is relatively small, totaling less than 1% of its loan portfolio. CIBC was the latest in a string of Canadian banks to report weak second quarters due to bad loans.