The Manhattan office market is beginning to make a comeback, but much has changed since the start of the COVID-19 pandemic. The persistence of hybrid and remote work have changed the equation for commercial rentals, both in terms of landlord-tenant relationships and the quality of office product on offer.
In Manhattan’s previously adamantine office rental market, advantage has shifted to tenants, who now enjoy greater flexibility in lease negotiations than they have in recent decades. The shift has strengthened landlord-tenant dynamics, with interactions occurring more frequently as landlords try in earnest to better understand tenants’ business needs. Chief among those needs? Amenities to lure employees back to the office, according to Rob Naso, managing partner at BGO, a real estate–management advisor that owns and is redeveloping 200 Madison Avenue and 757 3rd Avenue.
Increased competition means landlords are willing to engage in the leasing process at an earlier stage to ease stress and facilitate tenants’ engagement with the office market. At the asset level, landlords have upped the ante on investment in capital improvements. According to Brett Shannon, a senior vice president in CBRE’s New York City Agency Group, landlords are especially eager to invest in shared amenities to appeal to their target tenant base.
“Landlords have now become a participant in the tenant experience at the building, adding physical spaces and services that both complement and improve a day at the office,” he says, noting that renovations of shared amenities allow tenants to derive greater value from the space.
Additionally, Shannon says that landlords are playing a proactive role in helping tenants understand how office spaces can fit their specific needs, engaging architects to model potential adaptations. BGO, for example, provides tours for all prospective tenants, showing them the types of custom build-outs that can be provided for them, as well as a move-in-ready office option, a so-called MIRO. “Our design team sits down with tenants’ senior leadership and designs their space for them,” says BGO’s Naso, noting that the firm offers tenants access to its in-house construction team, too.
Tenant buildouts now cost $140 to $150 per square foot (€1389.6 to €1488.8 per sq m) according to Shannon, who says that, while landlords have continued to provide tenants with tenant improvement (TI) allowances, they have increasingly turned to in-house design and build teams to mitigate costs. In some cases, landlords have been willing to oversee construction of prebuilt or turnkey installations on behalf of incoming tenants. The goal is to make relocation as easy as possible for tenants who may be contending with capital constraints as they implement return-to-work initiatives, Shannon explains.
In addition to giving tenants new leeway to negotiate for bespoke office spaces, the post-2021 market has provided tenants an advantage in negotiating flexibility in lease provisions. According to David Hoffman, vice chair at Cushman & Wakefield’s New York City office, landlords of some non-trophy buildings are now offering flexible terms for small- to medium-size tenants. These terms might include the right to terminate early, to renew, to expand, and to convert unused tenant improvements into additional free rent, as well as more flexible sublease rights. Hoffman, who represents both office tenants and landlords, notes that in a balanced market these rights are generally reserved for much larger tenants.
Competition for tenants caused New York City office rents to fall on average 18 percent between 2019 and 2022, says New York–based Steven Ruggiero, vice president at Project Management Advisors, a construction-industry-consulting firm. Ruggiero notes that the drop in rents enabled his firm to move into a trophy building, the Empire State Building, which has undergone significant capital improvements to make it appealing to tenants, including the introduction of a state-of-the-art fitness facility, along with new restaurants and coffee shops at ground level.
Michael Joseph, vice chairman for Colliers in New York City, says that some landlords are providing shorter-term tenants high-end, turnkey solutions, and in some cases furnished and wired office suites. “The economics do not bode well for the landlords if this trend continues, except if the tenants they attract continue to grow and embrace the environment the landlord created for them and expand or extend for the long term, as well as help attract other tenants in their sector,” he suggests.
Demand for office and retail space is unlikely to recover to pre-pandemic levels in 2024, and Ruggiero suggests that this year will be another rocky one for the city’s office sector—but he expects occupancy to creep up as landlords improve amenities and employers implement hybrid-work and return-to-office policies. “Having the highest quality tech fiber connectivity, a stylish and refreshed office space, and better amenity offerings can help employees feel like the office provides better space for productivity than they have at home,” he says.
Landlords also are taking new approaches to designing improvements, some tailoring amenities to attract specific types of tenants and others creating a more porous environment that connects retail amenities to the street and welcomes the public. Take, for example, the Lever House, an iconic 21-story, 260,000-square-foot (24,154.8 sq m) Park Avenue office tower owned by Brookfield and WatermanCLARK, which underwent a $100 million redesign to attract high-end, boutique financial services tenants. The redevelopment provides 11,000-square-foot (1,021.93 sq m) floor plates, a remodeled lobby, and an upgraded public plaza with vibrant landscaping. The feature that most most resonates with tenants, however, is the exclusive Lever Club on the third floor, which overlooks Park Avenue and features a massive outdoor terrace, conference facilities, a private dining room, and a full-service bar.
Shannon also says that Fisher Brothers’ $100 million redevelopment of a mid-century, 50-story, two-million-square-foot (185,806 sq m) office tower at 1345 Avenue of The Americas, with views of Central Park, was designed to attract large tenants that fit the building’s profile. The renovation provides a new amenity center—@Ease1345—designed by David Rockwell. The center is complete with town hall–style conference capabilities, food and beverage options, fitness facilities, and a coworking space. It also includes an augmented reality–enhanced public art activation and an outdoor space with high-end dining.
This offering clearly resonated with the Fisher Brothers’ target tenant base; Paul Hastings, Intercontinental Exchange, and Brevan Howard have all elected to relocate their New York City offices to the building.
1345 Avenue of the Americas is one of a number of buildings that are adding public spaces and retail amenities that provide what San Francisco-based architect Brian Stromquist, co-lead of Gensler’s Technology Workplace Practice, called the “inside, outside” approach in his October 2023 Gensler report.
Darrell Fullbright, a principal and design director at Gensler’s San Diego office, aims to blur the lines between public and private and dismantle barriers between the workplace and community, with the aim of connecting people and enhancing the human experience of office real estate. “Investing in sidewalk-facing storefronts and adjacent street spaces provides a vibrant, amenity-driven environment for building tenants and attracts quality retail tenants, like restaurants with celebrity chefs, which is also good for the community,” Fullbright says. He notes that this hybrid concept also creates activity on the street, which benefits landlords by making their buildings look lively.
The relationship between office landlords and their retail tenants also has changed. Landlords who previously leased commercial space to the highest bidder have shifted their strategy, attempting to court more attractive retailers in an effort to accelerate the lease-up of upper floor space and improve the overall experience of their office tenants. Shannon notes that to attract retailers who will bolster a building’s market perception (such as celebrity restaurateurs), landlords may agree to a fee-sharing, management-type rent structure or make concessions similar to those offered to office tenants: term flexibility, free rent, and a TI allowance.
Michael Joseph of Colliers stresses that curating the right tenant mix for the success of retailers and the office asset is more important than maximizing retail rent. He notes, for example, that Capital Properties, which owns Trinity Center, at 111-115 Broadway in Lower Manhattan, mobilized an effort to cut off of car traffic on the adjacent Thames Street, creating a European-style, cobblestone pedestrian environment that will be thriving with dining options including a prominent brand-name restaurant, a speakeasy with membership opportunities, and a high-end coffee shop.
Paramount Group’s 60 Wall Street, which housed the headquarters for JP Morgan and Deutsche Bank, is also being redeveloped with green space to help connect it to the surrounding community. The building’s transformation, led by global design firm KPF, involved reimaging its lobby and indoor plaza, a privately owned public space (POPS) that will offer food and beverage options and public gatherings spaces. The amenity-rich plaza, located beneath a new, expansive skylight, will house the largest green wall in North America.
Low vacancy in developments like Hudson Yards, Manhattan West, One Vanderbilt Avenue, and One World Trade Center affirms that tenants’ willing to pay historic rents for new construction product—but the high cost of construction and today’s interest rates have brought ground-up office development to a standstill. Shannon notes that this void has allowed well-located, redeveloped office buildings that offer benefits similar to newly constructed product to compete for blue chip tenants at healthy rental rates. This principal was demonstrated by recent leasing successes at 550 Madison Avenue (Hermès, Chubb), 295 Fifth Avenue (Quinn Emanuel), and 360 Park Avenue South (ICONIQ Capital).
Shannon has a sunny outlook on the redevelopment of office buildings: “I think we’re now at a place where there are a lot of test cases that have yielded really positive results. Landlords will continue to invest in the evolution and improvement of office assets throughout New York, and over the next couple years, I believe we will see a comeback in capital markets and new owners stepping into this market with a fresh investment and money to spend,” he says. He notes that the city’s ambiance is already benefitting from high-quality building redevelopments. “The streetscape,” according to Shannon, “particularly in Midtown, is more vibrant than it was five years ago.”
