Manhattan Office Market Has A Breakout Month With A 70% Surge In Leasing Activity

A recent report by real estate firm Colliers shows that nearly 2,000,000 square feet of office space in Manhattan was leased in May 2024. The pickup in activity is a 70% increase over last year, which is leading to speculation that New York's office market is beginning to return to its pre-pandemic performance levels. That would be music to the ears of almost everyone involved in this important real estate sector.

Although it would take a more prolonged surge in activity to make up for the increase in office vacancy levels that have plagued the commercial real estate industry since the end of the pandemic, this latest news is still being eagerly welcomed by everyone connected to the industry. That's equally true for the regional bankers who hold hundreds of millions in mortgage loans and the commercial landlords who service the debt.

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Office REITs and developers have been hammered by high vacancy rates and rising interest rates since the end of the pandemic. This squeeze is creating the worst of both worlds. For much of the 21^st century, Office REITs and commercial developers maximized their buying power by taking out shorter-term loans at the lowest interest rates possible.

The logic behind the strategy was that Office REITs and developers could continually refinance their debt at low interest rates even if their assets underperformed. By and large, that strategy was successful until COVID threw two giant monkey wrenches into the works. First, the stay-at-home orders crippled markets like Manhattan when whole companies began operating remotely.

Then interest rates started increasing, and at the same time vacancy rates were spiking. The resulting crash saw office vacancy rates climb to a nationwide average of nearly 20%, according to Moody's and contributed to wiping out several regional banks. The Mortgage Bankers Association recently estimated that nearly $1 trillion in commercial debt will mature by the end of the year.

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That explains why the news out of New York is so encouraging. However, a closer look at May's leasing activity shows that a few large deals accounted for most of the two million square feet leased. The largest of the deals was a lease extension by Bloomberg on their space at 731 Lexington. The Bloomberg deal accounts for about one-third of the total square footage and is the biggest deal since 2019.

Another three deals at 22 Vanderbilt saw 300,000 square feet tied up on long-term leases. It's certainly a good start. Colliers research executive Franklin Wallach, who wrote the report, told The Real Deal website why it's so important when he said, "Pre-pandemic, on any given month, we were on average well above three million square feet, so it is always noteworthy when we talk about leasing volume with that number in the same sentence."

It will take sustained activity like what happened in May before Manhattan's office market returns to its pre-pandemic performance, but Wallach is hopeful. He said, "Even though demand is still struggling to keep up with the supply, we've seen in many areas of the market an indication of stabilization. It's not a foregone conclusion. We certainly have to see how demand and supply balance each other out for the rest of the year."

For obvious reasons, Wallach and his contemporaries in commercial real estate want to see some more big deals closed in June. Back-to-back months with several million square feet leased could be the beginning of a sustained comeback for Manhattan's office market. In either case, the May surge was certainly welcomed, because every square foot leased will benefit commercial lenders, investors, and brokers.

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