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Office tenants are taking on average 14% less space than before the pandemic, and more than half of leases signed before 2020 have yet to come up for renewal, a combination that threatens to keep vacancy rates elevated into 2027, JPMorgan said.
The leasing data, described by JPMorgan as “sobering,” were shared with bank clients after executives interviewed officials at commercial brokerage firm Newmark at the National Association of Real Estate Investor Trusts’ recent conference in Midtown.
Newmark estimated that about 57% of prepandemic leases have yet to have the chance to renew, an observation that echoes remarks last October from real-estate investment firm Cohen & Steers, which said the decline in commercial real estate values was “about halfway there.”
The renewal data from Newmark are national, but officials told Crain’s that New York’s figures are similar.
When clients do renew, they tend to lease less space, which is helping drive what JPMorgan described as an “availability headwind” that threatens to raise vacancy rates in the coming years by at least seven percentage points higher than they would be otherwise. Manhattan’s office availability rate hit a record 18% in the first quarter.
Although headline rents have held up or even risen in premiere towers, Newmark said, effective rents are down as much as 20% in “non-trophy” New York buildings after accounting for tenant improvements and other costs. Concessions are estimated to be 70% higher than before 2020 and typically include up to 14 months of free rent for a large 10 or 15-year lease.
Brian Waterman, a Newmark executive vice chairman, told Crain’s the Manhattan office market is seeing improvement and concessions are starting to show “a leveling” as demand for premium space picks up.
Tech clients, after shrinking their office footprints in recent years, are putting out feelers for new space. SL Green officials said at the recent real estate investors conference that “known tech demand” has nearly doubled since last year, to 5.2 million square feet, with giants including Amazon, Apple and Intuit all in the market.
Companies are also giving workers more workspace, a change from pre-pandemic times when the priority was to squeeze employees into tighter spaces by seating them at benches instead of individual desks.
“It’s a positive influence which helps push against some of this” glut of space, Waterman said.
Newmark reported a sequential decrease in leasing volume nationally in the first quarter. Net absorption was also down, meaning more space was vacated than filled, coming in at negative 15.5 million square feet in the first quarter compared to negative 8.9 million in the fourth quarter of 2023.
JPMorgan analyst Anthony Paolone said that Newmark’s observations “went a bit against the more recent anecdotes and other data showing some improvement in activity.”
Aaron Elstein , 2024-06-19 12:03:04
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