Generally speaking, tenants looking for class A space in Midtown and Lower Manhattan have multiple options to consider. Excluding those firms with extraordinary or immediate space requirements, this may reduce a company’s sense of urgency to commit to a lease. As a result, landlords trying to fill class A space face pressure, particularly considering that space options are going to mount as the market edges closer to 2018. Landlords with negligible vacancy or those experiencing steady leasing momentum, are holding out for the top bidder or the best tenant. Demand has been choppy, though, and a lot of buildings have significant looming vacancies. In turn, many landlords in the class A sector are not in the position to be overly selective and are scrambling to fill their buildings with tenants.
As a result, while most landlords in both Midtown and Downtown are still resistant to reducing base rents, they are more pliable in terms of concessions as they try to lure tenants. Concessions have been elevated for the last several quarters and continue to escalate. Free rent periods have increased to the point where landlords and providing at least one month free per each year of a tenant’s lease term. Additionally, landlords are pre-building space for smaller to mid-sized tenants as they cater to tenants’ efforts to contain costs. A few owners are even going so far as to introduce furniture packages to offset out-of-pocket expenditures by tenants. These buildouts are especially helpful to tenants as they can mitigate some of the cost and disruption of a relocation.
Owners of buildings that are slated to have significant lease expirations in 2018 through 2020 are especially nervous because there will be so much class A space being offered for lease in that time-frame, particularly due to the opening of the Hudson Yards complex, 1 Manhattan West and One Vanderbilt. Midtown and Downtown combined are expected to have a total of class A space available for lease approaching 30 million square feet by early 2018.
As it stands, corporate space users of 20,000 to 50,000 square feet already have an abundance of class A options to choose from in Midtown. A total of 70 midtown buildings currently have a contiguous block of at least 50,000 SF or more available for lease, while 149 buildings have a contiguous block of 20,000 SF or larger. This range of offerings does not yet include several million square feet of space in Far Westside buildings such as 3 Hudson Boulevard scheduled to deliver in 2019 or later. Downtown Manhattan is also loaded with class A office space, as there is currently 6.4 MSF of class A space available for occupancy now or within the next 12 months. Beyond that, an additional 1.8 msf under construction at 3 World Trade Center will be available for occupancy in 2018.
Getting out in front of the looming spike in class A options does not necessarily mean that all landlords are rushing to lock in tenants immediately. Some landlords are embracing this opportunity to renovate their buildings and better match the changing preferences of tenants by offering amenities such as outdoor space, conference centers, gyms, bike rooms and adding Wi-Fi throughout the building. The new construction of the last several years has set the stage for one of the more mobile leasing markets in quite some time. Additionally, as some tenants have vacated their offices for the first time in decades it has cleared the way for long overdue building modernization and space configuration efforts.
As 2017 approaches, more tenants should find themselves in the position to pick their spots in the market. Owners, on the other hand, cannot afford to play the waiting game. Landlords putting off the crucial capital improvements required to bring their asset up to snuff will face even more difficulties as more new and refurbished product comes available. Additionally, owners that wait too long for the market to come to them, hoping to hold out for a dream deal, are running the risk that a competing landlord will hit their prospective tenant’s bid.