Take Up Of More Expensive Office Space Outpace Cheaper Counterparts

USA – Data from CBRE shows that demand for office space with rent of at least US$100 psf in Manhattan rose faster than those costing less, reported the Commercial Observer on Tuesday night (4 January, SGT).

Notably, Manhattan recorded 105 rental deals for workspace costing at least US$100 psf in 2021. This translates to 114 percent increase from 2020 and is 18 percent higher than the five-year average. On the other hand, office space costing under US$100 psf still surpassed pre-pandemic levels.

But this does not mean that tenants are spending more for office space. “When you look at the calculation of what it’s going to cost them out of pocket, you add in the concessions, you see that even in the market for US$100 office space, the net effective rent is still low,” said CBRE’s Director of research and analysis for the tri-state, Nicole LaRusso.

“The feeling in the market seems to be that landlords are feeling a little bit more optimistic about being able to raise their asking rents, but that there’s still a need to offer a lot of concessions in order to get a deal signed.”

LaRusso noted that while the office market is sluggish, the fact that demand for Grade A office space is rising shows that flight to quality is taking place in Manhattan, and this trend is one of the major factors in the upswing in Grade A office rental deals there.

“I don’t want to say price doesn’t matter, but tenants are willing to pay higher rents in exchange for better amenities, better located buildings, newer assets with great building systems. US$100 buildings fit that profile, generally speaking.”

She explained that Manhattan saw a building and renovation boom prior to the pandemic. This led to migration to buildings with high-speed elevators, and the high-tech heating, ventilation, and air conditioning (HVAC) systems, as well as building located closer to amenities and public transport.

In fact, the amount of office space with such specifications surged 250 percent to 11.1 million sq ft at the end of 2021 as compared to 2016.

Moreover, CBRE thinks that office rents in Manhattan could hit new record highs. This is because more office rental deals costing over US$200 psf were inked in 2021 than in any prior year, and the number of rental deals costing at least US$150 was the highest since 2016.

In particular, financial firms accounted for the lion’s share or 45 percent for rental deals costing at least US$100 psf in 2021, while media and entertainment companies made up 18 percent of such leasing transactions. These industries respectively accounted for 69 percent and 3 percent of the overall leasing transactions in Manhattan for the whole of 2021.
“I think we feel pretty confident that the market is on a pretty strong, steady climb out of the low point from the pandemic,” added LaRusso.