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Strength of the Manhattan Market

There were recent publications that highlighted different views on the strength of the Manhattan market (in the Wall Street Journal and The Real Deal). I would like to share a few thoughts of my own.

I agree, Manhattan leasing activity may be up, but I’m a bit more circumspect about current market fundamentals.  Quantity and price are two very different things, and while leasing volumes for Q3 are up 35% YoY, stronger leasing volumes don’t always portend stronger asking rents.  

Growth was cited in the financial sector, but I’ll be honest; I just don’t see it. Neither does Boston Properties—who during last week’s investor conference said that financials are “quiet.” 


On a seasonally adjusted basis, financial activity sector jobs in New York City have actually declined over the last several months, and employment in the sector is up by just 3,200 since January—hardly the making of a rebound.  Moreover, year-to-date growth in financial activities has been more than offset by contraction in information sector employment.  The bright spot remains the professional and business service sector.  


Employment growth is one metric, but even growth in the number of establishments has been similarly lackluster. I’ll concede that it’s still too soon to tell whether the slowing in VC activity has contributed to the less-than-stellar pace of business formation.


With regard to leasing activity, two of the top ten leases for the quarter were for government agency tenants (local government typically hasn’t been the catalyst for economic growth), and I’m concerned about the degree of space that has yet to hit the market. There’s been a clear preference by tenants for occupancy in Class A buildings, which, of course, includes new construction.  What happens when BlackRock’s space hits the market?  Or Accenture’s space at 1345 and 155 AoA? The NHL at 1185 AoA?  Current availability rates understate the true level of future vacancy when new construction is underway.


Total net absorption of Manhattan space has been decidedly negative for the past several years, reflecting no end to the densification trend (at least yet), and I’m concerned that the bulk of rent increases has been due to inventory from newly constructed buildings.  Class B space may feel downward price pressure the most; net absorption of Class B/C space  has been negative since 2012.   


Are we headed for an immediate decline in asking rents?  Not necessarily. The increase in asking rents can continue as long as new construction is hitting the market and hasn’t been spoken for; for example, the 3 “new” buildings in Hudson Yards (55 Hudson Yards, 10 Hudson Yards and the revamped 5 Manhattan West) had a weighted average asking rent of $100.53 in Q2 2017; the balance of Class A buildings in Midtown had a weighted average asking rent of $87.25—13% lower.

An increase in concessions is mentioned, but I sense the softening is starting.


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Heidi Learner

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