New York City was among the first major metros to be hit by the coronavirus outbreak, and measures to contain the outbreak over the past four months have reduced office leasing to a fraction of its typical pace. Manhattan recorded only 3 million square feet of leases during the second quarter, the lowest quarterly total in more than 15 years, according to Newmark Knight Frank’s latest Manhattan office market report.
The decline in office leasing activity comes as no surprise, as New York City has lost 144,400 office-using jobs since the start of the global health crisis, the report shows, and the shelter-in-place orders prompted companies to rethink their business strategies, leading to a decrease in demand for office spaces.
Most of the office leasing activity was driven by subleases and renewals. Available sublease space increased by more than 500,000 square feet quarter-over-quarter and an additional 1.2 million square feet is expected to be added soon, NKF’s report shows. The overall vacancy rate has increased by 10 basis points, quarter-over-quarter, to 11.9 percent.
Another report by Avison Young revealed that most of the available sublease space was put on the market by technology, advertising, media and information tenants. These industries are expected to continue to be the largest contributors to additional sublease space coming online. Downsizing coworking and flex office space providers are also adding to the rise in vacancy rates across the market. In the second quarter, coworking space providers announced the closure of six locations encompassing a total of 440,125 square feet, according to NKF’s report.
Following six consecutive quarters of rent increase, asking rents dropped by $0.73 per square foot from last quarter to $80.98 per square foot. All three Manhattan markets and 11 of the 19 submarkets saw decreases in average asking rents quarter-over-quarter. The largest decline was registered in Midtown South, down $1.66 per square foot. Much of the rent decline can be attributed to the rise in available sublease space, however, downsizing coworking spaces and weakening demand are all putting downward pressure on rent rates.
With construction activity being halted for most of the second quarter, there were no new deliveries. A total of 16.1 million square feet of office space remained under construction and around 3.1 million square feet is scheduled for delivery in the second half of 2020, according to NKF.
A renewed focus on wellness
Despite a grim second quarter, Brian Waterman, executive vice chairman at NKF, is more optimistic about the future of New York City’s office market. “New York is starting to see a thaw as we’ve begun to re-board, and we are optimistic as landlords and tenants reengage the marketplace,” said Waterman.
Although the coronavirus outbreak is causing major distress in the office sector, it has also revealed that offices need to be more focused on wellness in buildings. As Waterman pointed out, “We’re learning lessons from COVID-19 as it relates to wellness in buildings and how landlords and tenants need to partner together. We’re seeing the importance of clean air, increased interior clearing, access to outdoor spaces, and touch-free surfaces that could remain as we move forward.”