Surviving the tech wreck: Manhattan office market could pivot

When the KKR snapped up Hudson Yards space abandoned by Meta Platforms this month, it may have signaled a trend in Manhattan’s office market: financial firms and other tenants filling a void left by Big Tech.

Technology firms had been on a leasing binge, heartening office landlords shellshocked by the pandemic. Then remote work’s persistence and pressure from investors forced even some cash-rich tech companies to reverse course.

“The financial companies are fortunately growing and taking advantage of the capital expenditures and the time and energy that a lot of these tech companies put into their space,” said JLL’s Steve Rotter, who brokered the deal for KKR at 30 Hudson Yards.

With recession fears and office availability increasing, the private equity giant and others swooped in, Current Real Estate Advisors’ Adam Henick said.

“I think overall periods of economic volatility and uncertainty create opportunity, and inevitably, companies with strong balance sheets that are positioned well are able to take advantage and use that as an opportunity,” Henick said.

Financial, insurance and real estate firms, sometimes called FIRE tenants, have — along with law firms — been the traditional backbone of Manhattan’s office market. But technology, advertising, media and information — or TAMI — tenants have expanded their presence in New York City over the past decade-plus, led by Amazon, Google, Meta and Twitter.

Now, notable tech companies are reducing their Manhattan footprints. Meta, the parent of Facebook and Instagram, did not renew its leases at Related Companies’ 30 and 55 Hudson Yards. The deals combined for roughly 250,000 square feet and ran through 2024.

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Meta disclosed in October plans to spend $3 billion consolidating offices. The company spent $413 million terminating office leases in the third quarter, including at Orda Management’s 225 Park Avenue South. Meta expected to spend another $900 million on office realignment in the fourth quarter.

Amazon reportedly rolled back an office expansion this past summer after being in talks for space at Brookfield Properties’ 5 Manhattan West in Hudson Yards.

Although the TAMI sector continues to make up a sizable portion of Manhattan office leasing, signs that its footprint is shrinking have emerged. FIRE tenants led Manhattan office leasing in the fourth quarter, accounting for 38 percent of deals, according to a report by Colliers. TAMI tenants comprised 23 percent.

FIRE tenants produced 43 percent of Manhattan’s office leasing activity last year, up from 38 percent in 2021, according to CBRE. Meanwhile, TAMI’s share fell to 19 percent from 27 percent.

Colliers’ Frank Wallach, who authored the firm’s quarterly report on Manhattan office leasing, cautioned against declaring a market shift to be underway. He noted that FIRE and TAMI tenants’ 60 percent share of the borough’s office leasing was on par with pre-pandemic figures.

“In the third quarter of 2022, two of the top five leases were driven by tech,” Wallach said, pointing to Datadog reupping and expanding to more than 300,000 square feet at 620 Eighth Avenue and Indeed growing to roughly 250,000 square feet at 1120 Sixth Avenue.

“We are seeing some space, if not coming back to market from some of the tech companies, being leased or taken over,” Wallach acknowledged. “However, because the situation can still change on a quarter-by-quarter basis, it’s still too early to tell.”

Another factor could be landlords’ preferences for tenants whose employees come to work, as FIRE firms generally do. TAMI tenants, not so much: Their jobs are generally more adaptable to hybrid or remote work.

“At the end of the day, it’s the tenants who pay rent that allow the landlords to pay the mortgage,” Raise Commercial Real Estate’s Doug Regal said. “I think the driver is getting credit tenants to pay rent. But I do think there is certainly consideration into wanting to have a building that’s activated and alive.”

Regal said if tenants are using a building’s amenities and “there’s a buzz about the building,” it “makes other people kind of want to be there.” Filling space in a property that feels abandoned can be tougher.

If Big Tech is indeed pulling back from Manhattan, smaller tech companies might step up.

“There is always a new hot ticket, and I would say we look towards AI at this point in time,” Avison Young’s Larry Zuckerman said. “They’re hard at work. Deals are getting made. I think the future may be a stronger, more experienced group of AI tenants now surfacing.”

While TAMI space is most likely to be recycled within the sector, private equity and hedge funds such as KKR, Apollo Global Management and Ken Griffin’s Citadel that are flush with capital could set the pace for FIRE tenants in Manhattan this year, Colliers office broker Michael Cohen said.

“Those guys are growing,” he said. “If you are dependent on a growth economy, then you’re going to be cutting back. But if you are raising capital to take advantage of the anticipated distress in many sectors of the economy, then you’re gonna be running on all cylinders.”

He recalled Warren Buffet’s adage, “Be scared when others are greedy and greedy when others are scared.”

“I think we’re seeing certain finance firms saying, This is a good time for us to gear up.”