Empire State Realty Trust, parent of its iconic namesake building, has offered the latest sign that New York’s office sector is increasingly becoming a landlord’s market, especially for owners of well-located properties with desirable amenities.
The real estate investment trust’s Manhattan office lease rate increased 1.6 percentage points in the fourth quarter to 94.2% after it signed about 379,000 square feet of deals. Mark-to-market rent, which measures the difference in rent in a new lease over the previous rent at the same space, rose 10.8%, the 14th consecutive quarter of positive leasing spreads, the REIT said in its earnings results released Wednesday.
Nearly five years since the pandemic made the hybrid work pattern in vogue and upended the office market, New York, the largest U.S. office cluster and a barometer of trends in the country, is showing more signs of recovery, boosted in part by more employers implementing stricter in-office rules. The city last year posted its best office leasing volume post-pandemic. CBRE, the world’s largest commercial real estate services company, recently said New York led most of the office leasing recovery in the United States.
To be sure, the recovery is uneven, with leasing data having pointed to tenants seeking new or renovated properties near transit hubs. While New York’s office vacancy rate has fallen below 14%, it remains near a record high, CoStar data shows.
“Return to office is no longer a question as leasing momentum in the Manhattan market has told the story for itself,” Empire State Realty Trust’s CEO Tony Malkin said Thursday on a conference call. “The office sector statistics illustrate the results of haves and have-nots. The haves are buildings like ours, which have been modernized, are well located near mass transit, are sustainability leaders, have great amenities and are owned by a financially stable landlord. … The price gap between brand new office and ours enabled us to raise rent and reduce concessions.”
$1 billion overhaul
The REIT has said it benefits from the so-called flight-to-quality trend of tenants demanding updated buildings with modern comforts. Empire State Realty has said it’s spent $1 billion in “modernizing” its prewar office properties, near the Penn Station and Grand Central Terminal transit hubs, with appealing amenities such as outdoor terraces, town halls and food and beverage options.
The 102-story Empire State Building's overhaul, for instance, included over 65,000 square feet of amenities with a 15,000-square-foot fitness center, a lounge space that can accommodate more than 400 people and a basketball and pickleball court.
“We've had and continue to have strong leasing momentum,” Tom Durels, the REIT’s executive vice president of real estate, said on the call, adding that the office leasing volume last year was the best since 2019. “Work from home is definitely not a factor. … There's recognition that there's a tightening in the market for the better buildings. … Choice for tenants are few for quality buildings and landlords not hamstrung by high leverage. … There’s a lot of positive momentum going to 2025.”
He expects the REIT’s Manhattan office leasing rate to top 95% by the end of the year and expects the combination of higher rents and lower concessions and tenant improvement costs is “setting up well for good net effective rent growth in the coming year.”
“Tenants are coming to the market sooner,” he said, adding that about 455,000 square feet of its leasing volume last year came from early renewals. “There’s a greater recognition by tenants that there’s a shrinking pool and supply of quality products in quality buildings with good landlords. There’s a greater sense of anxiousness to execute on leases.”
Vornado Realty Trust recently also pointed to a landlord’s market in New York as tenants are competing for an "evaporating" amount of space.