In an encouraging sign for landlords, office leasing volume in Manhattan, the largest U.S. commercial property market and a national barometer, posted its highest quarter of the pandemic in the face of falling rents and a slow return of workers.

The New York borough's third-quarter leased office space rose almost 28% to 9.23 million square feet from a year earlier and 26% from the previous three months, the strongest results since year-end 2019, according to a study by brokerage firm Colliers. Third-quarter demand was 13.5% above Manhattan’s five-year rolling average of 8.13 million square feet and 11.5% over the 10-year average, Colliers said. If that pace holds, 2022 will top 2021’s full-year total of nearly 25 million square feet by 29.1%.

The Colliers study comes as major employers recently reported that almost half of Manhattan office workers returned to the workplace on an average weekday, an amount that still represented a record high since the onset of the pandemic.

The difference between move-ins and move-outs last quarter was a “notable positive 4.13 million square feet,” Colliers found. While this net absorption since March 2020, when workers were sent home from the office, was a negative 34.76 million square feet, Manhattan recorded 1.83 million square feet of positive absorption in the past 12 months, Colliers said.

The availability last quarter also dropped 0.8 percentage points to 16.4% from the second quarter, the sharpest quarterly percentage point decrease since the third quarter of 2014 and the tightest availability since March 2021, Colliers said, adding that the year-over-year rate also fell.

Even so, there are headwinds. Security firm Kastle Systems’ most recent weekly data shows that the return-to-office rates in New York and among a 10-city average, after rising to pandemic-highs of about 47% and 47.5% respectively as of Sept. 14, both dropped again the following week.

The rate isn’t expected to pick up dramatically as just 54% of office workers are expected to be in their workplace on an average weekday by January 2023, according to the Partnership for New York City survey.

And a CoStar report found that “the pandemics’ negative impact on the New York office market is still evident at the start of” the fourth quarter. "The majority of companies continue to operate in either remote or hybrid settings. ... With some occupiers viewing remote work as a productive and cost-effective alternative, the amount of available sublet space remains stubbornly high,” according to the report.

After three consecutive quarterly increases, Manhattan’s asking rent average fell 2% to $74.07 per square foot, driven by decreases across all three major markets in Midtown, Midtown South and Downtown — the first time since the fourth quarter of 2020 that quarterly asking rent decreases were recorded in all three Colliers-designated areas, the brokerage said. The quarterly asking rent average declined in 13 of Manhattan’s 18 office neighborhoods.

There's another concern. While the availability rate narrowed, the available office supply in Manhattan has increased about 65% since March 2020 to a total of 88.61 million square feet, the Colliers study showed.

“Demand greatly outpaced supply during the third quarter and flight-to-quality was a key driver,” Franklin Wallach, executive managing director of research and business development for New York at Colliers, said in the report. “Numerous pockets of the market made significant gains in chipping away at the excess supply. However, this was not observed in all Manhattan neighborhoods, and with nearly 35 million square feet of negative absorption since March 2020, the demand must remain strong in order for availability to eventually return to equilibrium.”

The rate of return to the office has been uneven despite a post-Labor Day pickup, according to the Partnership for New York City, a business group with a membership that includes many of New York’s business leaders and companies. Responses to a survey by the group indicated employees believe they can be just as productive working remotely.

New York’s office vacancy rate has reached a record high of 12.3%, CoStar data shows. That level will probably remain “elevated” as New York still has “a nation-leading 17.9 million” square feet of office projects under construction, the CoStar report said.

The leasing and office-use trend continues to drive a sharp divide between properties that have appealing amenities and easy transit access that attract well-heeled tenants versus those that do not. The top three new leases of last quarter, for instance, were signed by accounting firm KPMG, investment firm Franklin Templeton, and hedge fund D.E. Shaw at either Brookfield Properties’ Two Manhattan West or SL Green Realty’s One Madison Avenue, both part of the new or redeveloping top-tier trophy towers commanding rents that are far above market averages.

Franklin Templeton, for instance, signed a 15-year, 347,474-square-foot lease at One Madison Avenue with asking rent of about $145 per square foot. At Two Manhattan West, KPMG leased about 450,000 square feet, while D.E. Shaw is occupying about 284,000 square feet over eight full floors.

Manhattan’s financial services, insurance and real estate sector led leasing by industry in the third quarter quarter with a 47% share of activity, according to Colliers. The technology, advertising, media and information services sector had the second-highest share of office leasing volume at 21%, followed by professional services at 18%.

Beyond the remote working trend that has raised questions about office space needs for some employers, worries about a looming recession and higher interest rates may also upset the pace of job market advancement, also a measure of potential office real estate demand. Office investment sales volume in New York last quarter tumbled 71% to $1.2 billion in sales from a year earlier as recession fears and rising interest rates weighed on capital markets, Colliers said.

There are also signs the tech sector, which has been a key driver of top-tier office leasing demand in New York and other markets, may be slowing hiring. Major tech firms’ job listings fell meaningfully in September by 16.1% from August to 61,400 listings, its lowest level since January 2021, according to BMO analyst John Kim in a report Monday. Since April, when the Nasdaq Composite Index began its descent, job listings have fallen 47.6% with cutbacks by companies including Apple and Amazon and in markets including New York; Seattle; Austin, Texas; and Silicon Valley in California, Kim said.

“Major tech hubs [are] vulnerable,” Kim said in the report. “We remain cautious on the office REIT sector given the pullback in hiring, particularly within the tech industry, which had been driving expansion leasing activity in recent years.”