Is Manhattan’s flight to quality over? Report shows dip

Rents for prime office space have fallen since peaking last year

Has Manhattan’s Flight To Quality Ended?
One Vanderbilt (Percival Kestreltail, CC BY-SA 4.0 via Wikimedia Commons, Getty)

The “flight to quality” is losing altitude.

Rents for prime office space in New York City peaked at the beginning of last year but dipped over the next three quarters, according to a new report.

“What we found is that effective rents for prime Class A space have been going up at a much higher rate than everything else, although this year in New York City they seem to have plateaued a little bit,” said CompStak’s Alie Baumann, one of the authors.

Average effective rents for prime Class A office space — which includes new construction, trophy and recently-renovated buildings — peaked around $105 per square foot in the first quarter of 2023. That was up 19 percent from the same time in 2019, according to CompStak, a commercial real estate data firm.

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But average effective rents, which factor in the concessions that tenants score from landlords, started to drop in the second quarter. They continued to ebb, finishing the year at around $88 per square foot, according to CompStak.

The lengths of office leases, meanwhile, are down overall but are recovering faster for prime Class A buildings. Office leases inked for regular Class A buildings suffered the biggest drop, falling to an average of 125 months from a pre-pandemic 154.

“These tenants aren’t committing to the major 10- or 15-year deals at the 50 Hudson Yards or One Vanderbilts of the world,” Baumann said. “They’re making more short-term decisions.”

Office landlords across the board are striking deals to attract tenants without lowering the nominal rates often demanded by mortgage covenants. Concessions remain well above pre-pandemic levels, especially in Prime Class A buildings, and made up about 12 percent of the total deal value in 2023, according to CompStak.

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