SL Green Realty, one of Manhattan’s biggest commercial real estate landlords, recently told investors that the city’s office market recovery was, “all green lights,” The Wall Street Journal reports. News like that would typically be a call for optimism. However, State Street recently became the latest company to release sublet space into Manhattan’s already crowded office market. Peloton and Macy’s have made similar moves in an effort to unload property. Meanwhile, JP Morgan Chase has put up 700,000 square feet for sublet at New York Plaza.
Typically, sublets are a great way for companies to decrease property costs when they have multiple years remaining on a lease. Subletting is currently an undesirable trend for New York City landlords right now however because they’re facing competition from their own tenants. Asking rent on sublet space in Manhattan is currently 27% lower on average than the cost of a direct lease, per Colliers data.
Sublet square footage has surpassed space that landlords offer directly since the COVID-19 pandemic began, The Wall Street Journal reports. At the end of July, tenant-released space comprised almost a quarter of New York’s total office availability. There was a time during the early summer months when it looked like the sublet trend was headed in the other direction. Unfortunately for New York CRE landlords, things changed course in July and several big blocks came onto the market and sublet availability reached a post-COVID high.
Sublets gaining steam
With subletting gaining steam, the pressure on rents New York landlords can charge new tenants continues to mount. Trying to remain competitive could make it difficult for enterprises like SL Green and Empire State Realty Trust to fully recover, according to The Wall Street Journal. Both companies’ shares are trading about one-fifth below their pre-pandemic levels.
The Manhattan office market could have been facing trouble even if the COVID-19 pandemic had not occurred. Approximately 25 million square feet of extra space in newly built blocks and existing building renovations are scheduled to be added between 2022 and 2024. That marks the most in a three-year stretch since the late 1980s, according to Franklin Wallach, a senior managing director at Colliers. Comparatively, there’s currently 21 million square feet of New York office sublet space in need of tenants already.
Owner of new offices will likely have less trouble renting out spaces, according to The Wall Street Journal. Corporate tenants tend to be more willing to sign leases at modern and energy-efficient buildings so they can reach carbon-reduction goals and entice workers to commute to a physical office location again. SL Green recently said its new midtown property at One Vanderbilt, which opens in October, is already 90% rented.
CRE owners with properties coming off lease may have more difficulty leasing their space. It won’t be until the heavy supply of space from companies like State Street slows down that New York office landlords will be able to feel like the worst is behind them.
Joe Dyton can be reached at email@example.com.