Manhattan’s sublease glut may be coming to an end

600K sf of subleases recently pulled off the market

1325 Sixth Avenue and 10 Jay Street (Paramount Group, ODA)
1325 Sixth Avenue and 10 Jay Street (Paramount Group, ODA)

The glut of sublease space in Manhattan’s office market may soon be a thing of the past.

As more workers are vaccinated and New York City relaxes its Covid restrictions, companies that previously listed their offices for sublease are now pulling them off the market. At least 589,000 square feet of space that was previously being offered for sublease has been de-listed as firms re-evaluate their spatial needs, according to a new report from JLL.

Cynthia Wasserberger, a vice chairman at JLL who authored the report, found that subleases now account for 30 percent of total vacant office space. But the quarter-over-quarter changes show an encouraging trend: Just 3.5 million square feet of office space was offered for sublease in the first quarter of the year, compared to 4 million square feet in the fourth quarter of 2020, and 4.6 million square feet in the third quarter of that year.

Subleases that have been pulled from the market in recent months include 100,000 square feet at McGraw Hill’s office at 1325 Sixth Avenue — the largest sublease offering that has since come off the market — and Rent the Runway’s 83,000 square feet at 10 Jay Street in Dumbo.

Ira Schuman of Savills, who worked with Rent the Runway, calls the trend a “major change” and something he says has never happened before. In the past, when space was added to the market for sublease, it stayed there.

Sign Up for the undefined Newsletter

Since the pandemic began last year, there was a real sense of worry in the office market, “but the panic has disappeared and now people are focused on managing their businesses,” Schuman said.

JLL’s Wasserberger noted in the report that there are several reasons why companies are pulling subleases off the market. Employees may be coming back to offices sooner than expected, and it may be better for the company financially to hang on to the office space rather than try and rent it out at the cheaper rates subleases often command. (According to a recent Savills survey, traditional leases command 25 percent more in rent than subleases.)

“In some instances, retaining the space is the more prudent decision rather than subleasing at what is likely to be discounted rates, particularly for highly improved space where significant capital was already spent,” Wasserberger wrote. “In these cases, the decisions reflected that some warehousing of space for future growth is defensible.”

Still, Ruth Colp-Haber, a partner with Wharton Property Advisors, believes building owners are experiencing “wishful thinking” when it comes to having sublets pulled.

“Many of the tenants looking to sublet space are doing so because they need less space now because of hybrid work policies,” she said. “That long-term trend will continue even though some percentage of employees will come back to the office to work some of the time.”

Other companies have already grabbed some of the better sublet spaces in their flight to better quality offices — some including furniture and fitouts — and all at lower rents. These include Noom, which is leasing 114,400 square feet at 5 Manhattan West from R/GA, and the Rockefeller Foundation, which is subleasing 74,320 square feet from Major League Baseball at 245 Park Avenue.