Manhattan office availability falls to 2020 low as leasing tops 10-year average

Manhattan tenants have signed 10.06 million square feet of office leases since July, pushing the third quarter 19.2 percent above its 10-year average and available space to its lowest level since 2020, according to Colliers research cited in Commercial Observer's Sunday summary under the headline 'The Best Office Market in Years.' The same week's macro tape read the other way, with September adding 29,000 jobs, unemployment ticking up to 4.2 percent, and the 10-Year Treasury reaching a 19-year high, a level the summary greeted with a glance back at the eve of the global financial crisis and a note that borrowers need to be at least a little nervous.

Both readings describe the same seven days, and the summary leaned on the leasing ledger, a defensible place to stand with one caveat the summary supplied itself: the 10.06 million square feet was a little lower than the second quarter's 11.02 million, so the market is past its strongest sequential pace even as it runs well above trend. Listed landlords have made the same argument from the other side all year, raising full-year guidance this summer on solid earnings and improving office leasing, while the equity index slid anyway as rate worries outweighed the fundamentals.

Who is signing matters as much as how much. Qube, a global investment manager, took 52,000 square feet at Related Companies and Oxford Properties Group's 70 Hudson Yards; IQ-EQ Fund Services and Bank of India leased at Stawski Partners' 1212 Avenue of the Americas; and Silvercrest Asset Management and i80 Group each took space at Fisher Brothers' 1345 Avenue of the Americas. Castle Hook Partners is planning room at the under-construction 625 Madison Avenue, so asset managers, fund administrators and investment firms are the tenants filling Midtown, and their own businesses run on the capital markets that have turned expensive.

The largest commitment on the list was a law firm's. Morgan, Lewis & Bockius took 205,000 square feet at Mitsui Fudosan America's 1251 Avenue of the Americas, the same tower where DLA Piper and Ascot each committed full floors this summer at $140 to $150 a foot, as this publication reported. A 205,000-square-foot law-firm lease is a credit tenant signing a long lease, and it pulls availability down rather than merely registering the decline.

Two smaller data points point in the same direction: Sentinel Capital Partners added 7,134 square feet at SL Green Realty's One Vanderbilt and took its footprint to 34,737, expanding in place instead of shopping the market, while Sony is in negotiations to anchor Tishman Speyer's 99 Hudson Boulevard, according to the summary, which reported no figure for the space. That the anchor decision is still open is part of why the availability number remains a live line rather than a settled one.

Trophy office clears tenant by tenant and trade by trade, with the bid going to occupied square feet, and September supplied the corollary. SL Green's SoHo sale, in which a fully leased Class A building traded to retire unsecured corporate debt, said more about capital costs than about Manhattan office demand, and the refinancing of a 93 percent-leased South Bay tower cleared as a one-off while Los Angeles vacancy held at 25.3 percent. A 10-Year Treasury at a 19-year high is the discount rate behind every one of those prints, and it sets the terms on which buildings trade regardless of how full they are.

The summary's other large trade ran through retail, with Brixmor Property Group and Everview Partners announcing they were acquiring the 63 million-square-foot Slate Grocery REIT for $2.34 billion. Retail's scarcity premium is tenant-specific, surfacing in grocery-anchored trades rather than as broad cap-rate compression, and a $2.34 billion grocery portfolio is that premium meeting a buyer.

If Manhattan's availability keeps falling from its 2020 low while the 10-Year stays where it is, the leasing market will have separated itself from the cost of capital, and the next office trade will have to price that. If availability stalls while the Treasury holds, the best office market in years will look like a demand story with a financing problem still attached.