While growth is expected to slow in the near term, the U.S. economy will likely avoid a recession and support modest commercial real estate activity. Nonetheless, commercial real estate pipelines have been declining for all property types (including office, industrial and multifamily) due to higher construction costs, weak demand fundamentals and the high cost of capital in the current interest rate environment. The office sector, in particular, has substantial headwinds related to softness in the market and uncertainty as to when demand will strengthen.

In New York City, the nation’s largest commercial real estate market, total employment has been steadily climbing, reaching an all-time high of 4.75 million jobs in the spring and summer months. The increase in employment was led by gains in the private sector and education & healthcare sectors, each reaching historic highs of nearly 4.2 million and 1.3 million jobs, respectively. Financial services employment, which is a heavy user of office space, rose by 5,500 jobs over the past year, despite a slight decline during the second quarter of 2024.

Manhattan has the largest office market in the nation. According to Cushman and Wakefield, a real estate commercial real estate and research firm, new leasing activity in Manhattan continued a positive trajectory in the second quarter of 2024, totaling 6.3 million square feet. This marked the first time in seven quarters that leasing exceeded 6.0 msf. The strong quarterly performance was boosted by seven new leases, each greater than 100,000 square feet, bringing the year-to-date  total to 11.4 msf—a 29.8% increase from the midyear 2023 output of 8.8 msf.

The average lease size jumped by 30.5% in the second quarter, growing from 9,684 sf in Q1 2024 to 12,639 sf. Class A (newer buildings) registered an even more significant uptick, increasing by 37.5% quarter-over-quarter to an average of 17,700 sf. Manhattan continued to benefit from robust demand in the financial services sector, which accounted for 30.4% of new leases of 10,000 sf and larger. Lease renewals through midyear reached 3.2 msf, an increase of 21.4% from 2.6 msf one year ago. Combined new and renewal leasing totaled 14.6 msf, up 27.9% from the 11.4 msf registered in the first half of 2023.

Despite the notable increase in leasing activity, the Manhattan office vacancy rate edged up only marginally by 20 basis points during the second quarter to 23.6%. Only four blocks greater than 100,000 square feet entered the market, down from 13 blocks in the first quarter of this year. For the first time since the third quarter of 2021, no new construction or fully renovated buildings were completed during the quarter. Sublease vacant space remained relatively stable at 22.6 msf but was down by 0.4% from one year ago, while direct vacant supply reached an unprecedented quarterly high of 99.1 msf.

According to Jonas Lang LaSalle (JLL) another major real estate brokerage and research firm, Westchester’s office market broke a one-year stretch of occupancy losses, recording slightly over 15,000 square feet of positive net absorption in the second quarter of 2024. A deceleration in sublease additions was a contributing factor in the reversal. The amount of sublease space entering the market declined 59% from the previous quarter. Second quarter leasing totals were primarily driven by renewals in the healthcare sector. Renewals accounted for 48% of velocity, highlighted by Danone North America’s 45,000-square-foot restructure at 1 Maple Ave in White Plains. Medical office leasing captured 37% of total volume. White Plains Hospital expanded outpatient services at 222 Westchester Ave (38,000 square feet), while Westchester Institute for Human Development committed to two full floors (59,000 square feet) at 80 Grasslands Road in Elmsford.

Again, according to JLL, Westchester’s favorable suburban demographics makes the county a popular target for education tenants as evidenced by Rebecca School’s expansion into Mount Vernon late last year. In the second quarter of 2024, Monroe College leased a 57,000-square-foot space at the New Roc City retail complex in New Rochelle. Private schools and colleges seeking to grow in the region are actively evaluating the potential conversion of obsolete office product.

JLL’s outlook is that quality assets in downtown White Plains and the immediate suburbs will continue to capture most of the activity throughout the remainder of the year and into 2025. Tenants that renew or relocate are likely to take less space, generating upward pressure on vacancy rates. With an empty development pipeline, landlords able to invest in amenities and tenant experience will succeed in capturing a greater share of leasing activity. Higher interest rates and a defensive lending environment will challenge marginalized office assets that require extensive reinvestment in order to compete.

About the author: Michael J. Paton is a portfolio manager at Tocqueville Asset Management L.P. He can be reached at 212-698-0800 or by email at [email protected].