When it comes to optimism over the trajectory of New York City's office market, landlord Steven Roth's glass isn't just half full, it's nearly spilling over.
Pointing to a dwindling pool of availability and a barren construction pipeline, the Vornado Realty Trust CEO said the market for high-quality space has evolved to a point where rents are climbing and tenants are competing for an "evaporating" amount of space. In other words, Manhattan is quickly becoming a landlord's market.
"Business is good, really good, and getting better," Roth told analysts on the real estate investment trust's earnings call Tuesday. "The cost of a new build has more than doubled over the past few years, and new supply is frozen. There's a shortage of space, and we are unbelievably enthusiastic about the market, the tightening of the market and the inventory we own."
Effusiveness aside, Roth's sentiments echo those shared among other landlords in that New York is at the forefront of the national office market recovery, especially when it comes to top-tier, well-located space.
More than 3.63 million square feet of office leases were signed across Manhattan last month alone, according to a new Colliers report, marking a nearly 40% spike compared to January 2024. The city's availability rate dropped to hover at about 16%, its lowest level since early 2021. For the seventh consecutive month, tenants signed on for more office space than they offloaded, standing out against a backdrop of significant downsizing and move outs plaguing other markets across the country.
For landlords and property owners, especially those behind the newest and nicest properties that have become the focus among tenants shopping for space, New York City's strengthening office market is already translating into a dearth of available space.
"Demand for space in New York is actually pretty terrific," Roth said of tenants across the financial services, legal and tech industries fueling leasing momentum. "As the market continues to tighten, there's nothing that says market rents can't go from $100 per square foot to $125 per square foot and then maybe substantially higher. That kind of income will cause values to increase monumentally."
The New York-based landlord signed about 583,000 square feet across its New York portfolio in the final quarter of 2024, boosting its year-end total to nearly 2.7 million square feet, excluding the retail space and its 555 California office tower in San Francisco. All told, Vornado's New York office portfolio occupancy ticked up to just shy of 89% by the end of last year.
Pipeline of deals
Similar to other landlords, however, Vornado warned of some lag time between leasing momentum and a material boost in occupancy.
The landlord has already backfilled about 80% of the known move-outs across its portfolio, President and Chief Financial Officer Michael Franco said on the call, but those new and pending deals — combined with the loss of lease termination income it reported last year — means a majority of that value won't land until late 2026.
Vornado expects its portfolio occupancy will land slightly higher than 90% before the end of the year, Franco said, potentially higher if its pipeline of anticipated deals close as expected. The landlord reported more than 750,000 square feet worth of deals currently under negotiation, with another 1.3 million square feet in the earlier proposal stages.
The company will also add Penn 2, the latest addition to its massive Penn District redevelopment, to its operable portfolio. Vornado is "weeks away" from landing a 300,000-square-foot office deal at the more than 1.8 million-square-foot tower, Roth said, adding the new building will likely be more than 80% leased by year's end.
Across the country, most office market stakeholders are still grappling with the aftermath of the pandemic.
Tenants collectively handed back upward of 65 million square feet last year, boosting the total to more than 180 million square feet of move-outs since the start of 2020. What's more, the leases that are being signed these days have shrunk considerably, averaging about 20% smaller than their pre-pandemic averages.
Back to the office
After years of waiting for tenants to return back to making large-scale real estate moves, many landlords say the time has finally come. Increased clarity over spatial requirements, combined with the sense of urgency created over the dwindling high-quality office supply pool, has meant more companies are committing to deals for larger periods of time.
What's more, the demand for office space has been building over the past several months as corporate heavyweights such as Amazon, Starbucks, Dell, Salesforce, among others push for more stringent in-person requirements. The number of CEOs who said their companies would adopt a full return to a five-day workweek climbed to about 85% from the 64% reported in 2023, according to a recent KPMG survey.
"Work-from-home was a scare, but as we predicted, it didn't last and won't last," Roth said. "Most people have left their kitchen tables and are now back at the office."
Even for companies that still provide some level of pandemic-era flexibility, some are realizing they may have cut more space than they should have and are now on the hunt to rebuild their real estate portfolios.
"There are a handful of tenants that we did leases with very recently who are already coming back for more space," the CFO said. "There was a level of conservatism on behalf of tenants who didn't know exactly what they would use or how much they would need. Now that they're fully back, they recognize they need more."