Manhattan office leasing activity surged compared with the second quarter of 2021, as the market registered its strongest performance since the onset of the pandemic, according to CBRE’s Q3 2021 Manhattan market report, issued Thursday.
Third-quarter Manhattan leasing totaled 5.88 million sq. ft., up 70% from Q2 2021. However, the Q3 total was still 5% below the five-year quarterly average of 6.16 million sq. ft.
“While still in the early stages, New York City is showing clear signs of a recovery,” said Nicole LaRusso, senior director of research and analysis for CBRE New York Tri-State, in prepared remarks. “In fact, new leases and expansions improved for the third consecutive quarter. The 5.88 million sq. ft. of total leasing in Manhattan was the best quarter since Q1 2020.”
For the year-to-date, Manhattan leasing has outpaced the same period in 2020 by 13%.
“The positive absorption is helping to chip away at the historically high availability rates, especially in Midtown South,” added LaRusso. “We’re seeing considerable sublease space withdrawals and leasing of available sublease space – both of which are eroding the glut of available space in the market.”
CBRE said that the financial services industry continued to drive Manhattan leasing activity through the third quarter, especially in Midtown.
Quarterly leasing activity totaled 3.31 million sq. ft. in Midtown, 13% below the five-year quarterly average of 3.79 million sq. ft. Absorption of 384,000 sq. ft. in Q3 was the first positive quarter since Q4 2019. Availability was 17.7% – a 10 basis point drop from the previous quarter. Year-to-date leasing in Midtown totaled 7.32 million sq. ft., down only 1% from the prior year.
Midtown South is well on its way to recovery with three consecutive months of leasing above the five-year monthly average. Quarterly leasing activity totaled 1.8 million sq. ft., up 47% from the five-year quarterly average of 1.23 million sq. ft., while the market’s year-to-date leasing activity totaled 3.11 million sq. ft., up 141% from the same period last year. Net absorption finished Q3 at positive 465,000 sq. ft. As a result of the robust leasing, the availability rate fell 60 basis points quarter-over-quarter to 18.8%.
Downtown is also experiencing positive momentum, recording 775,000 sq. ft. of leasing activity during the third quarter. This represents the third sequential quarter improvement in leasing activity, although the pace of demand recovery has been slower than in Midtown and Midtown South. Downtown’s year-to-date leasing activity totaled 1.81 million sq. ft. and renewal activity totaled 847,000 sq. ft. in Q3, bringing the year-to-date total to 1.14 million sq. ft. The availability rate increased to 20.9%, up 80 basis points from the prior quarter.
Avison Young: NYC Office Relocations Seek ‘Flight to Quality’
Avison Young, in its Q3 New York City Market Report, said post-Labor Day return-to-work efforts remain below pre-COVID levels even as other areas of the city become more active, impeding office leasing demand. Some tenants have capitalized on these market conditions, inking long-term commitments at high-quality office properties, causing leasing activity to improve on Q1 and Q2 2021 levels.
Closed deals totaled 7.0 msf in Q3 2021, up from a quarterly average of 5.6 msf in Q1 and Q2 2021. Large tenants have traded up when committing to relocations at new properties since April 2020, reinforcing the flight-to-quality trend and the discrepancy in market fundamentals between Trophy properties and other market segments.
Steady base rents and heightened concessions have caused net effective rents to soften, especially in the commodity sector of the market. Class A net effective rents decreased by 9.2%, or from $66.62 psf to $60.51 psf, from 2020 to Q3 2021.
Asset pricing has dipped by 16.2% since 2019, reflecting investors’ more conservative underwriting assumptions, an elevated proportionate share of Class B and Class C trades and more leasehold transactions.