The New York office market is beginning to regain its attractiveness

It’s nothing like the peak of 2019, but the first half of 2024 has brought real momentum back to Manhattan office space owners.

Tenants signed office leases for 11.5 million square feet during the first half of 2024, up 11% from the same period in 2023, according to JLL data provided for the first time to Bisnow.

“It’s a recovery in the sense that we are ahead of where we were at the same time last year,” said Andrew Lim, research director at JLL in New York. “We are also tracking more active requirements in the market and have a better sense that more leasing is on the horizon, which was not the feeling we had in the first half of 2023.”

About 2 million square feet of office space was earmarked for conversion in the quarter, reducing vacant office space from 17.5% in the first quarter to 17% in the second quarter, according to JLL.

Buildings taken off the market during the quarter included 1740 Broadway, which Yellowstone bought for $185 million after former owner Blackstone turned the keys over to its lender. The building is prepared to be converted, at least in part, into apartments.

“These are buildings that are older, that their anchor tenant vacated a while ago and they haven’t been replaced or no one has taken their space once they left,” Lim said. “It’s one of the things that will bring the New York office market back to a healthier state.”

Other examples include SL Green’s 750 Third Ave., a 35-story tower in midtown Manhattan that the REIT plans to convert into more than 500 housing units, as well as the residential conversion of pharmaceutical giant Pfizer’s former headquarters at 219 and 235 E. 42nd St.

“People have always said, ‘Why don’t we just transform all the buildings?’” Lim said. “Now we’re starting to see that come to fruition.”

Relocations accounted for 60% of leasing activity during the month, according to JLL. This represents a change from the first quarter, when the largest leases were renewals rather than new leases. But the biggest deal over the past three months was a major tenant staying in place, with Bloomberg renovating for nearly 1 million square feet at 731 Lexington Ave.

30 Hudson Yards, where several tenants signed sublease agreements in the second quarter of this year.

The biggest deal in June was Covington & Burling’s relocation from 820 Eighth Ave. to 30 Hudson Yards, where the law firm signed for 235,000 square feet. The second largest deal was Stripe’s sublease of 147,000 square feet to move into 28 Liberty.

Another sign of recovery was the decline in office vacancy in the city, which fell from 87.8 million square feet to 86.5 million square feet citywide in the second quarter, now standing at 18.1%.

That drop was almost entirely due to the take-up of space in Class A and trophy office buildings, according to JLL. Availability in trophy buildings dropped 10 basis points to 12.2% and fell from 19.3% to 18.8% in Class A buildings. More than 1 million square feet of Class B space recently became available during the same period.

“You’re starting to see solid (Class)A buildings that are just in very good locations and you’re starting to see more activity, even competition, for the space, because it’s the next best space available on the market. Lim said.

Subletting activity is fueling that dynamic, with availability having fallen to 19.7 million square feet after eclipsing 20 million square feet earlier in the year. This is happening as tenants try to wrest prime space from technology and media companies, which signed contracts for large blocks of prime space and have since moved to sublease them.

Signing up for those spaces puts those tenants in the front line for direct leases in the future, as Covington & Burling and trading firm Susquehanna International Group have already done in the Warner Bros. space at 30 Hudson Yards, Lim said .

“Competition will only get tougher as availability and new construction continues to decline and the best spaces become occupied,” Lim said.

Still, overall activity shows that New York City’s office market has a long road ahead, with vacancies at roughly double normal market levels, owners of nearly 90 million square feet looking for tenants and the future of work and the economy still up in the air.

“We are in a period where tenants are in the market, but transactions in general are taking longer because there are now many more levels of review and due diligence,” Lim said. “There is a lot of waiting that depends on the general macroeconomic outlook. Until that happens, all of these different factors that would help the market return to a healthy or normal state are on hold.”