Manhattan office leasing activity declined in August after improving in July. Research from Newmark Knight Frank shows that the office leasing activity during the coronavirus pandemic is down nearly 70% with 8.9 million square feet in transactions, a total of 621 deals. In July, activity began to rebound—showing potential promise for the market—with 2.9 million square feet of deals. However, activity fell again in August with only 1.4 million square feet of leasing deals during the month.
As office leasing activity declines, new trends have also emerged during the pandemic. Relocations have slowed compared to a year ago. Of the lease transactions greater than 10,000 square feet, 63.9% were relocation deals, down from 72.2% the same time last year. Most tenants are putting leasing activity on hold, and at least 36 major tenants in the market have announced plans to hold off on office leases until there is more certainty in the market. In addition, tenants are beginning to favor short-term leases. Nearly half—48.5%—of leases were signed for five years of less. By comparison, 28.1% of deals in the first quarter of the year were for five years or less.
The trend toward short-term leases is particularly concerning because it could delay the office market recovery, according to the report. NBC/Comcast, Mitsubishi International Corp. and GoodwinProcter LLP are among the tenants to sign short-term leases. This change in lease duration will likely last into 2021 and potentially through the pandemic. As a result, it could take several years to see leasing activity rebound.
An increase in sublease supply is yet another effect of the decline in leasing activity. The NKF report estimates that 16 million square feet of sublease space will hit the market through the end of the year. As a result, the sublease supply will increase 4.9 million square feet from early March. Nearly all of this supply—92.6%—is built space, suggesting that companies are bringing used, occupied space to the market, rather than potential expansion space. This is an important indication of where office usage could be heading, at lease in the near term. While this forecast for sublease supply is startling, the current market is smaller than it was in the last two recessions.
The decline in office leasing has impacted direct office providers the most severely, but co-working operators have also been impacted as well. Co-working is nimble enough to adapt to the changing market conditions, but in the interim, enterprise operators will outperform traditional co-working brands. For now, co-working companies are struggling. Many are suffering from lost revenue and have announced layoffs. Regus is among a handful of providers to file for bankruptcy. Co-working operators have already added 900,000 square feet to the sublease market or returned it to property owners.
Looking ahead, NKF predicts that the vacancy rate will increase by 4.3% from the pre-pandemic rate. It also expects asking rents to decline, but less than the decline in the previous recession. However, adoption of widespread coronavirus health and safety measures and a vaccine could improve the firm’s outlook.
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September 28, 2020 at 06:07PM
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Manhattan Relocations Down While Short-Term Leasing Rises - GlobeSt.com
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