As companies consider longer-term plans to work from home and the economy struggles, Manhattan’s office landlords are facing the specter of competing with their own tenants to lease space.
Major tenants such as Macy’s and WeWork have already made plans to offer up hundreds of thousands of square footage on the sublet market. Others are likely to follow suit, as companies look to trim costs by renting their excess space.
“We do expect a good amount of space to hit the market,” said Richard Selig, a managing partner at the brokerage Cresa, which exclusively represents tenants. “We just don’t know what that’s going to be.”
Much will depend on how the coronavirus changes companies’ office needs, he said.
“A lot of the larger tech companies rented a lot of space for growth and now we’re seeing people work from home,” said Selig. “There’s going to be some ‘shadow space’ coming onto the market.”
Sublet availability was a little more than 20 percent as of April, according to CBRE. That figure, which measures available sublease space relative to all space available for lease, generally becomes a problem for landlords when it hits around 30 percent.
Sublessors usually offer space at a discount to what landlords’ charge, which drags down pricing overall.
“Given where we are now, the market is in position to absorb a modest amount of sublease space without it becoming a real drag on the market,” said Nicole LaRusso, CBRE’s director of research for the tri-state region. “I don’t think we expect a lot of sublease space to hit right away. I think it’s going to take a while.”
To her point, subleasing offers fell after Gov. Andrew Cuomo’s March 20 executive order directing non-essential workplaces to close, as companies focused on dealing with the pandemic and adapting to work-from-home for an indefinite period. For the same reasons, it was also not a good time to market space.
In the seven weeks following the governor’s order, Manhattan office tenants put about 920,000 square feet of space up for sublease, according to CBRE. Prior to that, the monthly average was about 900,000 square feet. On a per-week basis, the drop was a little more than one-third.
Examples of sublease offerings since mid-March include Fitch Ratings putting up a block of roughly 100,000 square feet at 33 Whitehall Street in the Financial District and e-commerce fashion site Moda Operandi making 85,000 square feet available at 195 Broadway, according to CBRE.
But activity may pick up as some companies struggle to survive and others find that many employees can be productive working remotely.
In Long Island City, Macy’s is reportedly looking to sublease 40 percent of the 867,000 square feet it signed up for at Tishman Speyer’s Jacx complex for its new corporate headquarters. WeWork is reportedly looking to sublease its global headquarters on West 18th Street in Chelsea. And Twitter, which in the past few years has leased some of its space to Netflix, Lyft and Major League Baseball, just announced its employees can continue to work from home permanently.
In addition, there’s potentially a huge supply of shadow inventory from companies that took extra space to allow for growth when they signed big leases in recent years.
When the financial giant BlackRock leased 847,000 square feet at 50 Hudson Yards in 2017, a portion of the square footage was excess space the money manager planned to use to add employees, which was a condition for receiving lucrative tax breaks.
That kind of space is often what gets dumped on the market first when the economy turns south.
During the Great Recession, the sublease availability rate climbed above 30 percent. And following the 2001 dot-com bust and the terrorist attack of 9/11, it topped 45 percent.
Lehman Brothers’s office space hit the sublet market almost immediately after the investment bank filed for bankruptcy in 2008. The crippled giant was soon followed by financial institutions including MetLife, Citigroup and Bank of America flooding the market with space.
CBRE’s LaRusso said this time is different, given the uncertainty over how companies will use their space when they return to work. Even if more employees work from home, social distancing requirements could compel companies to expand their offices.
“Employers don’t really have a good sense for their space needs because this crisis is unique,” she said. “I don’t think they’re looking to dump space as fast as they can, because they might need it.”
Contact Rich Bockmann at rb@therealdeal.com or 908-415-5229